23 September 2019
#AnEconomyDerailed #Don’tBlameSitaraman
I am actually languid, a luxury I can afford with my consulting and analytical work, after retiring from a life of a daily metronome. Hence my take on the Bahikatha or budget was to wait and watch. Now I have lost count of all the incremental changes announced by Ms Nirmala Sitaraman as Finance Minister, from July to September, she has been as predictable as how unpredictable our monsoons have turned out. If the IMD issued alerts on two occasions calling for schools to be closed in Mumbai-Thane-Konkan regions by the government, on both occasions, the clouds held, even the sun came out for a peek! As my ward’s teacher of science joked in their class, it was Vikram and Vetal with Vikram opening his mouth to utter a theory and Vital taking off swiftly, performing his vanishing act!
India’s first full time lady Finance has not had a easy time, because for last five years, India has not had an easy time. Around 2013-14, it became clear that lot of Indian investments or advances failed to fructify as tangible assets, and despite the advancement of a Bankruptcy Code in all fairness to the Government, despite its measures of shoring up the balances of banks by pump priming their liquidity through small capital infusions, both measures failed because they were overwhelming by a ‘creeping incrementalism’ which incidentally was praised by most economists, but which I for one, and there were quite a few like me out there, cried out loud as being too little too late.
The first indication that all was not proceeding as planned, that the orchestra was jarring an odd note or two, came when Mr Rajan as our Rock Star RBI Governor made some noise in his 3rd year. In all probability , the wizard that he is supposedly, took his own measure of the Indian economy, before coming up with a blue print. He then took up the issue of making a clear target- 15 top defaulters, whom he wanted the government to negotiate with at the highest level to pare down their debts. Then he was denied extension. The next person to his chair Mr Urjit Patel was always a stop gap, and we know now for sure, because it has happened, that the massive corporate debt was to see a write off, one that has seen the RBI transfer its surpluses to the Government, ‘surpluses’ that it is meant to deploy to curb fancy financial footwork of money changers, a kind of shock troops to prevent a run on the Indian economy by any set of marauding factors. Now Mr Patel too, retired prematurely, rather than allow his name to be associated with the scheme.
We know that if Ms Sitaraman continues in North Block, her 3rd Budgetary effort would have her stamp somewhat, for macroeconomic stuff has a steep learning curve, she herself would be wondering why she is right now more like a circus artiste, taking two paces front and two paces back. Of course, unlike ‘Roll Back Sinha’ she gets more pilloried because she is from peninsular India and because she is a woman. ( The RSS chief has spoken his mind on three occasions this year about the misogyny that is going to descend on us, that women are primarily meant to get married and have children, because you realise the biggest problem facing India right now is unemployment of our youth, and if we can take away 40-50% of them by this charge of ‘domesticity’ it would make things easier for the rest?)
So most of the tax proposals that Ms Sitaraman raised in her budget to improve the fiscal deficit by bringing additional revenue, was calculated to plug some numbers which were missing from her budget speech. The gap from her estimates, to actual numbers in her budget was close to the exact amount now transferred to the budgetary account by RBI and with another tranche coming before this fiscal March of almost an equal amount, Ms Sitaraman has the space to toy with her numbers. So she reverted her tax proposals, allowing the indices to respond with great upward surges, after declining due to multiple factors, which were primarily domestic, but the last one was asymmetrical warfare that the Houthi played on Aramco and the reaction of indices in India was to spurt in crude prices.
What has missed most Indians even now, is how from 2014, the Indian economy has become more susceptible to global events, which is a result of two separate factors- first is greater integration with global economy, the second is intrinsic weakness. The combination can be deadly if the people inside are weakened in economic strength, without buffers to tide over bad news. While business is cyclical, there being its share of ups and downs, like cricket where we say form is temporary, class is permanent, the inherent strength of the Indian economy was how it had an outer core of regulated formal economy, supported by a much larger, informal and loosely regulated informal economy. What ever you hear as heartwarming stories of Indian ingenuity unfailingly came from this informal economy. Few Indians look at ITES as what it should be- informal economy to begin with. Our entire Software industry did not have any regulations for decades, the government and her revenue officials simply kept away from this sunrise sector of the 1990s till it became the biggest revenue earner for India by the first decade of the new millennium.
Where Mr Modi failed in his first term was not only to identify sectors where the mechanisms would remain informal, but in buying the RSS argument that informal sector was ‘black’ and needed to be demolished to make the economy transparent and all white. That was attempted through the program of high value currency denominations substitution, which yielded next to nothing, only incurring more expenditure to the exchequer by way of diverting the entire banking sector from its routine and forcing it for one whole year to simply become a currency substitution counter! So the formal economy went on an extended bank holiday, the legs of the formal economy- the banks went about opening pygmy accounts by the crores, transferring money to RBI and receiving money from RBI, without scouting for opportunities to lend, without checking on advances and receipts, because of the state of emergency that went undeclared but imposed on all the banks under ‘Demonetisation’.
It was to have a much greater impact in the informal sector. That very place where ideas germinated, where people in India’s regulated and bureaucratic set up could unleash their animal spirits in microscopic level. It was also the place where farmers who are not part of the formal economy due to non taxation of agrarian income, got their funds. So India first braked hard on its formal economy doing precious little for better part of a year from 08 November 2016 to January 2018, then India simultaneously denied her entire rural economy its monetary system, first by ceasing the operations of cooperative and rural banks, by drying up the funds with Mandis and traditional money lenders, and by not allowing agricultural inflation which would have otherwise helped farmers when there was agrarian output declines. Import substitution in the entire agrarian sector was a priority for the Modi government, which was clear about regulating retail inflation, because NDA1 lost out in 2004 due to this factor too. Eventually low food prices, low retail inflation were two great political narratives for Mr Modi in the run up to the May 2019, before Pulwama-Balakot trumped all with its upsurge of nationalism.
The economy in India had shifted from 2004 to 2014, a decade now acknowledged by the World Bank as one that saw 300 million Indians lifted out of poverty. What it did was to shift the allegiance of the semiurban and rural economy from agriculture to micro industries and services. It was also because, agro-sector under UPA did not get the boost it needed- FDI in horticulture and agro industries, to scale up from being a producer to a producer-processor, any initiative that was vociferously opposed by the then opposition-BJP. This was the reason why agrarian distress did not affect the vote bank, as it did in 2004.
You see a mature tree takes long to manifest signs of decaying roots. India’s roots are that she is an agrarian society. Since 1991, for many reasons, which include difficulties in setting up manufacturing business, delays in Bankruptcy proceedings and debt insolvency, to nature of land laws where the penchant is always go for green field and not reuse of land banks, India has not made the switch to a manufacturing economy. She has a huge chunk in services industry, but outsourcing of services is a global requirement, under stress due to machine learning and AI. Her attempts to resurrect manufacturing was the gear lion of Make In India, which never was meant to be more than feel good optics! The need for reform in ‘big bang’ form was very obvious, in fields of ease of business and regulation, involving labour, banking sector, tax architecture and though Mr Modi implemented the GeM and GST, these were operational changes without the necessary structural changes in place. That is why the economy has not been able to generate revenues through GST at the scale the government had an appetite for. That is why India is still primarily agrarian, and ultimately there is only so much revenue that services can generate. In fact, the second largest contributor to national GDP is remittances from abroad, which again makes India susceptible to overall global economic trends.
Domestic industry was merely catering to domestic demand. Demand sputtered and has now died all together. So what was needed was to spur it, by putting money in the hands of people. What RBI rate cuts, now corporate tax rate cuts have done is to reduce the earning potential of the Government and the banks including the RBI. We know that benefits of cuts in taxes never get passed on to the end consumer, they will only trickle down. Trickle down theory has been proved to be more a trick than a theory. So the logjam will fester into a recession full blown by December.
In six swift years from 2014- 2020, India will have missed the bus once again, while China, even neighbouring Bangladesh will grow faster. The clue to the NRC riddle is not that it was a political exaggeration alone, it could well be that over the last six years, many illegal immigrants have leaked back into Bangladesh due to favourable domestic conditions there, could it not?
Our obsession with short term, with headlines, with optics, means we have a media that is likely to deliberate or discuss the current scenario with any level of credibility in 2030s. By then India would have slipped to top 20 economies, her underwhelming performance would come up to scupper the grandiose dreams of her ultranationalist mandate. When then happens, may be her mandarins might just dust off some reports and discussions of ‘Structural Reforms’ and launch some measures of correction. If India is not to become Somalia, the decade from 2020-2030 is most crucial. Right now, it appears that the onus for such a deliverance rests with informal economy licking its wounds after 2016 and finding a way out of the quagmire staring it in the face! It is the never say die attitude of ordinary Indians that will offer succour to India. To her ‘Daridranaryan’s intuitive common sense’ will India owe her debt if she escapes her tryst with demographic disaster! Until then, relax, sit back and face the music dished out by the orchestra…
indiarubberman.com 