Dressed-up Budget figures can't hide reality

Not to see the elephant in the room amounts to denial of a strange kind. Yet that is exactly what the Union Budget for 2017 and the Economic Survey preceding it seem to have done. By not taking note of demonetisation the Budget presented an upbeat take on the economy. Now, a week after the Budget, the Reserve Bank of India has considerably sobered expectations by not lowering the repo rate despite expectations from the corporate sector that it would reduce the repo rate below 6.25 per cent. This was after a period when the RBI was seen as abdicating its responsibility and independence by refusing to release up-to-date data about the demonetisation, its confusing and contradictory orders to banks and its acquiescence in the government’s reckless experiment on notebandi. The RBI was sceptical about the government’s figures, as the government appears to be fiscally responsible while pushing for more public investment but the fiscal deficit is not based on a reasonable estimate. Another unspoken reason for India’s investment slowdown is that bank credit to Indian companies has declined 60 per cent since 2011, not because of high interest rates but since banks are unwilling to lend further as many loans have gone bad.

There are contrasting views on how the economy has performed after November 8. The official view, based on government-collected data, and the view based on firsthand accounts of hundreds of news reports in the print and TV media. Making no estimate of the loss caused to the economy and to livelihoods by the abrupt notebandi, the finance minister’s speech goes on to quote the International Monetary Fund, which predicts a growth rate of 7.2 per cent in 2017, not very different from the estimate by the Central Statistics Office (CSO) of 7.1 per cent growth for the half year ending September 2016, before the note ban was effected on November 8. By advancing the presentation of the Budget by a month, the government is conveniently spared the consideration of GDP figures released by the CSO for the October-December 2016 quarter. These figures are normally released in mid-February, in time for the normal Budget, and would likely have presented a bleaker account. Such is the contention of professor Arun Kumar, the country’s leading authority on the black economy. Reports from the field indicate that wholesale trade is still down by 20 to 30 per cent. This means that retail demand is still low two and a half months after demonetisation was announced.

“Such a sharp decline in trade and other reports from the field from industry suggest that the economy is facing recessionary conditions,” maintains Mr Kumar. Unemployment has increased, specially in the unorganised sector, which employs over 90 per cent of the workforce. “When employment falls, profits fall and investments are cut back,” argues Mr Kumar, “That is when irreversibilities arise. After November 8, 2016, demand was hit all round, production slowed down, profits fell and all of that led to unemployment and decline in investments which leads to long-term effects.” So, while growth would definitely have slowed, and perhaps even become negative in the last quarter, this is likely to have long-term effects on the economy, considerably slowing it down. GDP could fall next year. Can the government then hope to collect as much from taxes and meet its revenue target of '21.5 trillion? A fall in revenues could either lead to a ballooning of the fiscal deficit or a reduction in development expenditure. This could further slow down an already ailing economy.

Thus having got the GDP growth figures wrong could lead the government into a dilemma. It could either let the deficit balloon, leading to foreign investment drying up as the rating agencies, with their fondness of the fiscal deficit as an analytical tool, base their investment proposals on it. Or the government could push up investment in the economy, salvaging it from a depression at the cost of foreign investment. The UPA government chose the latter option in 2008 and India was a refuge from the global financial crisis of that time. Their mistake was that the pouring in money years after it was really needed led to high inflation, which contributed to bringing down the government. Despite all the brave talk and the overweening confidence of Narendra Modi regime, the economy was doing badly even before the notebandi gambit. The government has had many seemingly inspired schemes — from JAM (Jan Dhan, Aadhaar, mobile) to Swachh Bharat to Make in India. But despite their high visibility, the fundamentals of the economy remain weak. Industrial growth has gone down. A look at the data shows that industrial growth touched 13.5 per cent between 2009 and the first half of 2011.

Since 2012 it has averaged two to three per cent. Money supply (an important indicator of growth) grew by 19 per cent to 20 per cent in 2005-06 and 2006-07 respectively, but by 11 per cent in 2015-16, and is expected to grow by less than 10 per cent this year. That means, unless people are suddenly using cash credit twice as efficiently as they have done so far, real growth has probably also halved. Employment growth has slowed from six to seven million a year in the non-agricultural sectors between 2004 and 2011, but is now at barely a million a year. The bigger problem now is the recession. The public is curious to know how much black money demonetisation unearthed but the government is not providing any answer to this as yet. The decline in lending to industry was focused on the infrastructural sector, with power and telecommunications setting the trend. Outstanding loans to power, stand at Rs 5,253 billion at the end of November 2016. As a result, banking is reeling under bad debts and several large infrastructural projects are facing a crisis. Available figures show that during April-November 2016 industrial growth virtually stagnated at 0.4 per cent, as compared with a 3.8 per cent rate of growth during April-November 2015. Eager to present a good image the Modi government has dressed up the Budget figures to show that all is well. But sooner rather than later it will have to confront the declining trend in the country that the notebandi has initiated.