Yashwant ko Gussa Kyun Aaya? Numbers Do Not Look Good For Economy

Few folks are surprised that overall growth has slumped by over two percentage points from levels expected earlier.

In late 1956, Mao Zedong began plans to make China a great economic power, a match for west Europe. He began, as always, with an inscrutable slogan: “Rid China of four pests: no rats, no sparrows, no flies and no mosquitoes.”

All over the country, women waved brooms and rags, beat utensils and drums to scare away sparrows. Hecatombs of sparrows dropped dead from exhaustion. This part of the project was a great success.

Exactly 60 years later in November 2016, Prime Minister Narendra Modi announced his plan to withdraw nearly 90 percent of India’s currency from circulation, overnight. This cash crunch was expected to eliminate black money, cash funds for elections, lead to a formal economy, end terrorism, boost growth and cure dyspepsia.

‘Raid Raj’ and ‘Economic Terror’ Began 3 Years Ago

Well, probably dyspepsia wasn’t part of the menu. Anyway, 10 months later, the kharif or monsoon crop has shrunk 3 percent; in April-July, industrial growth is a mere 1.6 percent, down from 6.5 percent a year ago; July saw industry crawling at 1.2 percent, mainly because factory output contracted 0.2 percent.

On Wednesday, 27 September, Yashwant Sinha, a two-time finance minister in the governments of Chandra Shekhar and Atal Bihari Vajpayee, lashed out at Arun Jaitley, the current incumbent at North Block in a newspaper column. His op-ed quickly went viral on social media, where it was greeted with unexpected levels of approval.

Sinha pointed out the ills of the economy and blamed Jaitley for most of them. He pointed out (correctly) that finance was a huge and complex portfolio which required constant attention.

Jaitley, who once held defence, corporate affairs and information and broadcasting, apart from finance, has proved a spectacular flop. (Jaitley has been divested of two portfolios – he is now the finance and corporate affairs minister.)

Sinha, a member of the BJP, who handed over his Lok Sabha seat to his son Jayant in 2014, has taken his own sweet time to protest. He was silent when Modi implemented demonetisation, silent when the hopelessly planned GST was rolled out.

The ‘raid Raj’ and ‘economic terror’ that he accuses this government of unleashing, began three years ago.

Back in the real world, capital goods were dented because investment dried up: Consultant CMIE expects Gross Fixed Capital Formation (GFCF), the measure of physical investment, to contract 2 percent in 2016-17, the first time this will happen in at least 10 years.

Mid-Size Businesses Struggling with GST

Demonetisation hit the unorganised sector hard. This is the largest contributor to exports of shoes, jeans, polished diamonds and so on; it also employs nine out of 10 Indians. As exports choke, joblessness and frustration rule from Surat in Gujarat, Kanpur, Uttar Pradesh and Tiruppur, Tamil Nadu. These are hubs of gems, leather and textile exports, respectively. Demonetisation came into force in November, and export growth fell to 2.6 percent from 9 percent the previous month. Between January and March 2017, exports have shrunk.

Meanwhile, imports have jumped from October last year. None of the usual suspects, like a hike in domestic demand for foreign goods, a rise in the rupee or a spike in the price of crude oil, are guilty: demand is flat, the rupee is roughly at October 2016 levels and oil, around $50 per barrel, is cheap.

The only plausible explanation is businesses with ties to global markets are taking out vast quantities of money by mis-invoicing imports and things like travel spends. 

It is easy to stash dollars abroad by overpricing imports and foreign exchange spending. It is easy to bring this back as so-called ‘foreign direct investment (FDI)’. Lo, imports have grown, as has FDI.

The Goods and Services Tax (GST) was planned by the UPA government. It was to be a simple tax with one or maybe three rates for all goods and services, across states. A simple, transparent GST was to replace the maze of excise, service tax, VAT, octroi, surcharges and exemptions that fragment the market.

Well, the Modi regime made a dog’s breakfast of the original GST. 

It has rolled out a monstrosity bristling with at least half a dozen rates, multiple exemptions and a Byzantine filing system. Most mid-size businesses can’t comprehend or comply with this.

Since Demonetisation, $6 Billion Out of India’s Market

For example, biscuits are charged a different GST rate than chocolates. This provoked Congressman Veerappa Moily to ask how Kit-Kat, a mixture of both, is classified and taxed. On 25 September, Kotak Securities wrote, “GST revenues have come under some doubt with regard to tax credit, filings and technological issues clouding the tax collection scenario…”

Few folks are surprised that overall growth has slumped by more than two percentage points from levels expected earlier. 

Not only China, but 10 other nations, including Ethiopia, Uzbekistan, Nepal, Tanzania, Laos, Cambodia and Myanmar are growing faster than us.

Today investors in liquid assets like stocks are headed for the exit. From November 2016, when demonetisation came into effect, foreign portfolio investors have taken more than $6 billion out of India. In August and September alone, $4.7 billion has fled.

Back in Mao’s China most sparrows died. Caterpillars and bugs which sparrows used to eat, began to proliferate. They destroyed standing crops and created food shortages. Unable to do anything meaningful, after a while Mao quietly replaced ‘sparrows’ with ‘bedbugs’ in his slogan.

Also Read: Yashwant Sinha Writes on the “Mess Jaitley Made of the Economy”

(The writer is a Delhi-based senior journalist. He can be reached at @AbheekBarman. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)