‘All Is Well’- Says Who?

By Satyajit Mohanan

In 1742, Thomas Gray in his poem, “Ode on a Distant Prospect of Eton College” had famously written, “where ignorance is bliss, ‘tis folly to be wise”.  It meant that it was better to remain ignorant as things go south which may otherwise cause one stress. It seems that it is highly appropriate to use this idiom to reflect on the Indian’s government management of the economy.

India’s ruling party the Bharatiya Janata Party (BJP) is busy running social media campaigns to assuage concerns about the economy and the government’s actions or inactions. It defended Prime Minister Narendra Modi and claimed that the Indian Economy is “rebounding”. Whereas India’s Prime Minister Narendra Modi has not, to this day, made a statement acknowledging India’s economic crisis. He has also not attended a single press conference on the ongoing pandemic and its economic fallouts. India’s Finance Minister Nirmala Sitharaman had recently stated that India’s economy is facing an ‘act of God’ which might result in its contraction. By willfully absolving herself and her government’s responsibilities towards the state of the economy, she now blames God. It must be remembered that India witnessed a serious economic slowdown four years before the pandemic struck the country, owing to a series of economic misadventures carried out by the government. While a benighted government is still in denial mode, economic data reflect that India is staring at a severe economic crisis.

The provisional estimates of GDP for the first quarter (Q1 of 2020-21) show that the GDP has declined by a whopping 23.9%, its worst slump in decades. The data released by the government showed that the economy contracted in the first quarter (ended June 30) of the financial year 2020-21. This is the sharpest contraction since quarterly figures started being published in 1996. India’s nationwide stringent lockdown which resulted in the closure of business activity owing to the pandemic is said to be a critical factor for this slump. However, India was already facing a strong economic slowdown prior to the pandemic with a downward growth of 5.59% in FY19 and 3.09% in FY20.  The IMF has also confirmed that India’s GDP is the worst-hit among its G20 counterparts. Growth has severely decreased in many sectors except for Agriculture, Forestry, and Fishing. Manufacturing is down 39.3%; Construction by 50.3%; and Trade, Hotels and, Transport by 47.0%.

Image 1: Twitter

Many in India believe that this GDP number does not reflect the true gravity of the economic distress and that this figure is at the upper end of the estimates. This is mainly because there has been an absence of real-time data. The Indian Government last week informed Parliament that it has no data on the number of Micro, Small, and Medium Enterprises (MSMEs) that have closed down from FY 2014-15 to FY2019-20

Prior to the pandemic, India witnessed a 45 year high in its unemployment rate. Due to problematic reforms such as demonetization, which witnessed the withdrawal of 86% of Indian currency and the hasty implementation of the GST, an indirect tax regime, the situation got worse after the lockdown. As per CMIE data, 121 million jobs were lost between the economic slowdown and the pandemic. The unemployment rate increased from 8% in March to a whopping 26% by May.

Image 2: The Economist

Official trade data for April was the grimmest in over two decades. Merchandise exports have collapsed by over 60% and imports have also contracted. This adds to the current export stagnation, driven by a lack of competitiveness in Indian exporters and sticky labor laws. Exports have been stagnating at around $300 billion for the last ten years. Countries such as Bangladesh and Vietnam have outsmarted India’s export potential.

The government is also facing a shortfall in tax revenue. The GST revenue collected this August was 12.5% lower than the amount collected last year. The fall in tax revenue reflects lower economic activity. Demand has fallen as a result consumption has contracted, investments have declined, output and incomes are lost, and banks are hesitant to lend owing to a lack of confidence.  Former Prime Minister of India and economist Dr. Manmohan Singh argued that “the foundation for reviving our economy is to inject confidence back in the entire ecosystem”. The Modi government has done very little to inject confidence in the lives of people, entrepreneurs, bankers, industrialists,  multilateral organizations, and credit rating agencies.

A Flawed Stimulus Package:

In May, PM Modi grabbed the headlines with the announcement of Rs 20 Lakh crore stimulus package which amounts to 10% of India’s GDP. The package was highly controversial and confusing as the government did not provide the complete details of the package, mixed monetary and fiscal measures, and left the farmers, migrant laborers, and the poor out of the stimulus package. It is alleged that a majority of the stimulus, financed through borrowing was announced to fill the tax revenue gap and ensure a healthy fiscal deficit.  It is believed that the government has counted the Reserve Bank of India’s liquidity measures which amount to 5.24 lakh crore. To confuse liquidity measures that work on the supply side with that of fiscal stimulus which works on the demand side, reeks of intellectual ignorance.

The fiscal stimulus package did not provide cash transfers to lower income-groups and did not address the needs of farmers, migrants, workers, self-employed, the lower middle class, and mainly the poor. The package also consisted of credit guarantees and reforms which were in the grind for a long time and were repackaged. For instance, the three-month credit extension for exporters was not a new measure and was announced by the central bank on the 23rd of March. The RBI in its recent annual report concluded that India’s fiscal stimulus package was a mere 1.7% of GDP in comparison with stimulus packages for G20 countries which amount to an average of 12.1% of GDP.

The ruling party does not have a coherent economic thinking and its government lacks a consistent economic policy. The Government’s behavior, especially that of the Prime Minister and the Finance Minister reflect a state of contemptible moral and intellectual ignorance. PM Modi at a gathering in Houston last year famously said “Sab Changa Si” or ‘All is Well’, assuring the Indian diaspora on the health of the economy. However, the current state of the economy and the overflowing economic data show otherwise. It’s time for the government to wake up and smell the coffee.

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