The deceleration in economic growth from an already low of 6.1% during the last quarter of financial year 2016-17 to 5.7% during the first quarter of current year 2017-18 has prompted critics [this time, including Yashwant Sinha, former union finance minister in erstwhile NDA government under Vajpayee] to say Modi’s economic policies are responsible for what they allege ‘as loss of 2% in the GDP [gross domestic product] growth.
The growth during January-March 2017 at 6.1% was 1.8% lower than during January-March 2016 at 7.9%. Likewise, the growth during April-June, 2017 at 5.7% was 1.4% lower than during April-June 2016 at 7.1%. Thus, even on quarterly basis, the decline is lower than 2% mentioned by critics. Even so, to formulate an opinion merely on this basis is not the right way to go.
The comparison on year-to-year basis would be a better way to judge things though ideally, a longer period should be allowed. This is all the more when the relevant years in which these two quarters fall, saw implementation of two extraordinary policy decisions viz. demonetization and GST.
The growth during 2016-17 was 7.1% which was 0.5% lower than 7.6% achieved during 2015-16. During current year also, it would be premature to jump the gun merely on the basis of low growth during the first quarter. While, Modi – government is hopeful of significant recovery during the rest of the year, even Asian Development Bank [ADB] has projected growth for 2017-18 at 7%.
That apart, the assessments by Yashwant Sinha et al are myopic and miss the big picture. During the last 40 months of its stint, this government has brought about structural policy reforms aimed at ensuring sound macro-economic fundamentals and putting the economy on a high growth trajectory in the long-term.
Thus, it has removed the stigma of ‘policy paralysis’ [that stung the ruling establishment especially under UPA – II] by taking decisive action on various policy issues, bringing about total transparency in governance and zero tolerance for corruption, simplifying the bureaucratic processes, clearing the backlog of projects by expediting approvals, improving the ease of doing business and above all eliminating the trust deficit with the public.
All these structural changes are meant to lay the foundation of double digit growth on a sustainable basis. Indeed, the economy already started reaping the benefits by way of high growth during 2014-15 and 2015-16 led by surge in inflow of foreign capital on the one hand and substantial step-up in investment by government on the other. The momentum was sustained during the first three quarters of 2016-17.
No doubt, in the following two quarters, there was some setback. But, this should be read in the context of three major decisions which Modi –dispensation believed – rightly so – are necessary to make the economy robust and healthy. These were (i) demonetization [November 8, 2016]; (ii) GST [July 1, 2017]; (iii) Insolvency and Bankruptcy Code  and amendment in Banking Regulation Act  to deal with the galloping NPAs [non-performing assets] of banks.
Demonetization was meant to cull out black money that was harming the economy in several ways besides depriving the government of precious resources needed for supporting welfare schemes for the poor and funding development projects. Its implementation involved ‘instantaneous’ withdrawal of 86% of the cash with public and since its replacement by new currency took some time, the impact was ‘unavoidably’ felt particularly on small and medium enterprises who were dealing mostly in cash.
Likewise, implementation of GST from July 1, 2017 had its inevitable effect on GDP numbers for the immediately preceding quarter i.e. April-June 2017. This is because dealers did not lift products from the manufacturers as their prime objective was to clear their inventories before the D-day [July 1] and thereby avoid the hassles of living with un-claimed input tax credit. Consequently, the sale by manufacturers slumped during this period impacting growth.
The NPAs of banks – 75% of these with public sector banks [PSBs] – is a legacy issue. In the past, these were allowed to proliferate and not even recognized. As part of clean-up ordered by the Reserve Bank of India [RBI] under Modi – regime and completed on March 31, 2017, these were reflected in the balance sheet of banks. This government is implementing a credible action plan to deal with NPAs – using provisions of the IBC and amended BRA.
Meanwhile, continuing stress on balance sheet of corporate borrowers has hampered their ability to make further investment which was already low due to excess capacities already built up [e.g. steel and power] in the past. With rising stock of NPAs, PSBs are reluctant to extend loans exacerbated by fear of action by vigilance agencies/anti-corruption watchdogs. This acts as a drag on growth.
Team Modi is using these far reaching measures to bring about a paradigm shift in the way Indian economy is governed. Thus, the churning triggered by demonetization has enabled formalization of the so called ‘informal’ economy, bringing millions of tax dodgers in the tax net, reining in money laundering by cracking down on shell companies and promoting digitalization/electronic transactions.
The GST is even more transformative as it seeks to bring every transaction within its fold thereby denting generation of black money and making tax revenue increase by leaps and bounds [collections during July and August from just 2/3rd of those registered are higher than target]. Additionally, it will make our goods and services more competitive by removing cascading effect of taxes and drastically reducing transaction cost and saving time.
At the same time, overhauling of the banking sector is leading to replacement of a cult whereby loans were given on the basis of connection of potential borrower with ‘powers that be’ to one where these will be given strictly on viability of projects. This will prevent generation of fresh NPAs and make banks healthy and robust capable of meeting the needs of growing economy.
Together with an ‘honest’ and ‘transparent’ government responsive to the needs of industry and businesses, these measures should pave the way for double-digit growth in a sustained manner. While, critics will do ‘what they want to do’, the 1.25 billion people of India should keep their trust in Modi intact to ensure that he is able to deliver.