Modi government's biggest failure will hurt
Over three years into the Narendra Modi government, the economy presents a strange paradox. On the one hand is a positive sentiment that springs from overall macro-economic stability and fiscal discipline that the government has managed to bring about, although aided so far by low crude oil prices.
That sentiment has had a rub off on the country’s bourses, which are trading at all time highs. However, at the other end of the spectrum, the general public, by and large, remain concerned with the twin troubles that have come to dog the Modi government — creation of jobs, and rise in prices of essential commodities.
In fact, recent surveys have identified job losses as the biggest failure of the Modi government, followed by the rise in prices of essential commodities, and farmer suicides. CMIE, in a recent report, has said about 1.5 million jobs were lost during January-April 2017, the quarter immediately following the days of demonetisation.
The estimated total employment during the period was 405 million compared to 406.5 million during the preceding four months. RBI in its monetary policy review has warned of a further slowdown in manufacturing and private investment. The services sector contracted in July and fell to its lowest level in nearly four years following the implementation of GST.
The Nikkei India Services Purchasing Managers’ Index plunged to 45.9 in July, the lowest since September 2013. Just when the economy seemed to be settling down after demonetisation came GST. While GST is expected to simplify the country’s tax structure and bring in more under tax net to boost tax income, it is as disruptive as demonetisation, if not more.
With the manufacturing sector in dire straits, and services sector challenged by GST implementation, the economy is likely to go through much pain as job losses continue and private investment reaches its nadir.
Banks, on the other end, are at the receiving end of a major clean up drive in their NPAs, which will leave them less profitable for a long time as they have been directed by the RBI to make provisions for the bad loans in their books. IT companies have
IT companies have been laying off thousands of their workers. Crude prices, on the other hand, are beginning to rise touching $52.42 (Rs 3,361 approx.) a barrel on August 4, threatening to upset the country’s fiscal discipline.
Amidst these uncertainties come the mid-year Economic Survey for 2017-18, which has said that achieving the high end of the 6.75-7.5 per cent growth projected previously will be difficult due to the appreciation of the rupee, farm loan waivers and transitionary challenges from implementing GST.
The first volume of the Survey in February had predicted the range of GDP growth of 6.75- 7.5 per cent, factoring in more buoyant exports, a post-demonetisation catch-up in consumption and a relaxation in monetary conditions consequent upon demonetisation.
Since then all the new factors — real exchange rate appreciation, farm loan waivers, increasing stress to balance sheet in power, telecom, agricultural stress and transitional challenges from implementing the GST — impart a deflationary bias to activity, the Survey said.
Since February 2017, the rupee has appreciated by about 1.5 per cent. Experts say that the country has to move into the 8, 9 or 10 per cent growth levels to see any significant change in the jobs scenario.
Even government spending, which has offered some relief from the lacklustre industrial growth because of poor private spending, is not sufficient. For a GDP of the size of around Rs 160 lakh crore, a public spending of Rs 1.5 lakh or Rs 2 lakh crore cannot make a significant difference.
The worst case seems to be that of manufacturing. According to Madan Sabnavis, chief economist at CARE Ratings, the problem with manufacturing is that we get carried away by policies that are announced, be it Make in India, higher FDI, or ease of doing business initiatives. But without supporting demand, all these initiatives mean nothing.
Unless people start spending more money, and capacity utilisation starts rising from the 70 per cent at present, there is no point in making more investments. Whatever green shoots one saw in September last year were nipped by demonetisation.
Without investments, there can be no new jobs, and coupled with increasing automation, lakhs of jobs will continue to be at stake. Not a rosy picture, at all. The only saving grace is that none of these factors may be long-lived. Prices of essential goods are not going to continue at the high levels that they are today.
Tomato prices already seem to be falling, coming down to Rs 60 a kilo in Mumbai from the high levels of Rs 80 and Rs 100 a fortnight ago, even as several consumers have reluctantly struck the vegetable off their menu.
That should be some relief to the government, and if the rest of the monsoon remains strong, should halt the rise in prices. Likewise, the fruits of certain steps like GST should start playing out in a year from now.
If crude prices too remain in the $50 (Rs 3,212 approx.) range this year as expected, a major economic disturbance can be avoided, though jobs can still be a spoilsport.