The downward revision in the GDP [gross domestic product] estimate for current year by the Reserve Bank of India [RBI] in its latest monetary policy review from the previous estimate of 6.9% [that itself was a significant reduction from the original 7.4%] to 6.1% now confirms the lingering fear of substantial deceleration in the economic activity that started from the second quarter of last year.
When, the GDP growth declined to a six year low of 5% during the first quarter of current year, the expectation was that the growth momentum would pick during the 3rd and 4th quarter with the banking regulator projecting growth rate of 6.6% and 7.4% respectively. Now, if RBI itself is forecasting 6.1% for the whole year, it shows that earlier expected recovery during the second half may not materialize.
The most crucial factors which resonate in analysis by commentators across the spectrum are slackening private investment and lack of aggregate demand even as the government is not spending at the same pace as in the previous years. Our policy makers – both in the central government as well as the RBI – are in sync with this assessment and initiated a series of steps to address these constraints.
From the government side, finance minister, Nirmala Sitharaman has announced a number of measures viz. steep reduction in corporate tax rate bringing it in sync with global standards; consolidation of 10 public sector banks [PSBs] into 4 major banks capable of meeting the credit need of an economy on high growth trajectory and competing globally; recapitalization of PSBs with another dose of Rs 70,000 crore; opening up a special liquidity window for non-bank finance companies [NBFCs]; simplification of GST [Goods and Services Tax] regime, reduction in tax rates and prompt refund of input tax credit [ITC] to the small and medium enterprises [SMEs]; expediting payments by government departments and public sector enterprises [PSEs] and package for boosting exports etc.
Sitharaman has even gone that far to even take back some of the decisions announced in the budget for 2019-20 viz. increase in the surcharge on the super rich [those having annual income above Rs 2 crore] as also on capital gains – both long-term and short-term – made by foreign portfolio investors [FPI] investing in India as association of persons [AoP] or trust.
The RBI on its part, has reduced the policy rate [interest rate at which it lends money to commercial banks] during the current [albeit calendar] year 5 times cumulatively by a total of 1.35% – latest being in the recently announced policy review on October 4, 2019. As a consequence, the policy rate is currently 5.15% down from 6.5% in the beginning of the year. The apex bank is also helping the economy by pumping liquidity using a combination of policy instruments including open market operations [OMOs].
With so much of policy support, one would have expected sustenance of high growth achieved during the last 4 years [an average of 7.5%] in fact, further acceleration. Yet, if things are moving in the reverse gear, there is need for deeper introspection. One needs to know as to why private investment is not picking up? Why aggregate demand continues to remain weak?
At a very basic level, aggregate demand depends on aggregate purchasing power which is a function of the number of persons employed and their income as well as those who are self-employed and their earnings. The jobs and earning opportunities for self-employed in turn, depends on investment in setting up factories, building infrastructure etc. So, investment and demand feed each other; it is difficult to determine as to which one precedes the other. It sounds more like the ‘chicken and egg’ story.
The crucial point is that both investment and demand are slack. If, this is happening despite sumptuous measures to boost both [in fact, not much space is left after corporate tax rate has been cut to record low and policy rate reduced to a 10 year low], we need to look at a factor viz. corruption and scams which is talked a lot but whose economic ramifications are seldom analyzed.
To understand this, let us decode the latest scam concerning the Punjab and Maharashtra Cooperative Bank [PCB]. The scam came to light when the RBI imposed a ceiling [Rs 1000/- initially later raised to Rs 10,000/- ] on withdrawal of money by depositors. The former had to do this as in the event of latter recalling all their money, the bank won’t be able to pay up. This is because over 70% of their deposits was given to a single borrower viz. Housing Development Infrastructure Limited [HDIL] which has gone in default.
The amount of default is a mammoth Rs 6500 crore. The investigation by agencies has clearly demonstrated that this was a fraud perpetrated by promoters of HDIL acting in collusion with the bank’s top brass [how else, one can explain a single entity accounting for 70% of its loan book; how come a whopping 22,000 bogus accounts were created to camouflage this loan]. The economic implications of this fraud need careful scrutiny.
The promoter took money with a clear intent to defraud the bank. The funds were siphoned off and used to increase his personal wealth [much of it stashed abroad and used for acquiring aircraft, yacht, real estate etc] and even shared with politicians adding to latter’s riches and extravaganza. The depositors had accumulated their hard earned savings to spend on meeting their household needs viz. refrigerator, AC, car, bike etc when needed. With these savings looted by the fraudsters, they will have nothing to spend.
Thousands of crore in the hands of a few – snatched away from lakhs of depositors – is the surest way of exterminating demand and pulling down growth.
The HDIL promoter has also defrauded home buyers. He took hundreds of crore from them with a promise to deliver homes; instead diverted the money. Herein also, the economy got a jolt in two ways: first, by killing demand for cement, iron, other building materials and labor etc that would have been generated if homes had been built; second, scuttling the ‘discretionary’ spend [e.g. furniture, furnishing etc] by home-buyers upon delivery of homes that didn’t happen.
The HDIL is one among hundreds of such scams. Some prominent ones are Punjab National Bank [PNB] scam: Rs 14,000 crore; Infrastructure Leasing & Financial Services [IL&FS] scam: Rs 90,000 crore; Indiabulls Housing Finance Limited [IHFL] scam: Rs 100,000 crore; now defunct Jet Airways [it has debt of over Rs 25,000 crore]; Sterling Bio-Tech scam: Rs 6000 crore; Adarsh Credit Cooperative Society: Rs 4,000 crore; Rose Valley scam: Rs. 15,000 crore; Saradha scam: Rs 4000 crore; tens of real estate scams etc. Add to this the loot by scamsters under GST [about Rs 100,000 crore].
In the aggregate, these scams tantamount to sucking out couple of lakh crores from the pockets of millions. It is this gigantic loot that erodes the purchasing power, affects the ability of banks and non-bank finance companies [NBFCs] to lend and hampers the efforts of government to spend on building infrastructure and fund welfare schemes. Unless these are tackled on a war footing with focus on recovering funds already looted and preventing further loot, any amount of fiscal or monetary stimulus will fail to deliver.
Modi and prosecution agencies alone can’t do it. The bureaucracy and the judiciary too need to play their role, former by being alert and latter by giving decisions on fast track.