The state of the economy is much in discussion these days. That is natural, considering the resurgent GDP growth rates of the past couple of years that had earned India the tag of fastest growing large economy have come down in the past three quarters. On top of that is a continuing dearth of private sector investment, and job creation.
The debate is more often black and white rather than nuanced, but the issues are important and deserve to be understood better. Much of the criticism seems centred on the effects of demonetisation, its apparent failure to curb black money, and the teething troubles of the Goods and Services Tax (GST). While there are elements of truth in those views, the reality is somewhat more complex.
The manner in which demonetisation was projected to extinguish black money played out rather differently. It had been argued that up to Rs 3 lakh crore of illicit, tax-evaded money would not come back into the banking system. Many had found that argument credible, this writer among them. But that was not to be, with the Reserve Bank of India (RBI) reporting that only Rs 16,000 crore out of the Rs 15.44 lakh crore of discontinued currency was not deposited in banks.
There were also rumours that most tax evaders gamed the system and found loopholes, especially via large numbers of unused bank accounts of the poor, to get their money laundered and back into the system. However, there is more to this than meets the eye.
Recall that in the weeks after demonetisation, RBI kept changing the rules for depositing and withdrawing cash, know your customer (KYC) norms and suchlike. Though there was criticism of those frequent changes, what was happening was a cat and mouse game between hucksters trying to launder black money and the authorities trying to clamp down on it.
It now bears watching how much of that deposited money gets entangled and inaccessible as a result of the stricter norms. Data mining by the taxman, linking Permanent Account Number (PAN) cards to Aadhaar and other such measures will undoubtedly cause grief to those who cannot legitimately explain the source of those funds.
In any event, if you think demonetisation did not have much impact on curbing black money, all you need to do is speak to real estate developers and private, for-profit college proprietors. Other than political funding, for whose reform I have written separately in this and other publications, these two sectors were arguably the biggest users of black money in the economy. While they had been facing challenges in recent years, demonetisation, and subsequently GST, dealt a severe blow to their cash-based business models.
In fact, all cash-heavy sectors have suffered from the one-two punch of demonetisation and GST, with the latter’s impact likely to sustain due to its inbuilt systemic pressures for compliance. Those businesses that can survive a transition from tax evading to tax-compliant will nevertheless suffer higher costs, lower demand and thinner margins. This has certainly contributed to the economic slowdown. The point is, you cannot have your cake and eat it too by simultaneously claiming that demonetisation and GST hurt the economy, while also insisting black money did not get affected.
The relevant questions now are: How long will the economy take to recover from the disruption of demonetisation? How long will the initial glitches of GST implementation last? And, what will it take to boost investment and jobs?
The first is partly answered by the Economic Survey-II of 2016-17. It showed, first, a monthly dip in MGNREGA demand for job work due to the demonetisation cash crunch. Thereafter, because other jobs were likely disrupted, there was a significant surge in MGNREGA that lasted nearly three months before returning to normal. That probably indicates a settling down of economic forces impacting the poorest citizens, albeit at a lower level of growth than before November.
On GST, some critics harp it was too big a second disruption to have been launched so soon after the first, but most agree that its impact will be very positive in the long run. The current pain of its clogged online system, declined returns, and extended deadlines is testing the government’s bandwidth. Nevertheless, according to the World Bank’s country head, GST is a “tectonic shift” that may propel India into “8 per cent plus growth rate”.
That will require investment. Public investment has been picking up, with increases on infrastructure, defence, railways, and now rural electrification BSE 1.82 %, beyond the FY17 revised estimates. And foreign direct investment (FDI) has been growing steadily, setting a new record last fiscal.
But domestic private investment remains in a funk. Boosting confidence and competitiveness will require easing credit flows. That is easier said than done, considering the accumulated mess in the banking system, though inflation is still low enough to drop interest rates. Devaluing the rupee could be another option, to boost exports.
Growth is likely to bounce back as the effects of GST kick in. Though job creation will increase as well, the stark reality is that because of technology, automation and disintermediation, 8 per cent GDP growth, or even 10 per cent, no longer supports as many jobs as it used to. Radical measures, such as a universal basic income (UBI) will need to be considered.