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Top Indian government officials are engaged in a vociferous public debate over the state of the countrys economy.
Rajiv Kumar, the head of the governments think tank Niti Aayog, recently claimed thatthe current slowdown was unprecedented in 70 years of independent Indiaand called for immediate policy interventions in specific industries.
The Chief Economic Adviser, K Subramanian, disagreed with the idea of industry-specific incentives andargued for structural reforms in land and labour markets. Members of Prime Minister Narendra Modis economic advisory council sound inchoate, resorting to social media and opinion editorials to counter one another.
In essence, the quibble among the members of the economic team of Mr Modi and his government is not about whether India is facing an economic slowdown or not, but about how grave the current economic crisis is.
This is a remarkable reversal in stance of the same group of economists who, until a few months ago, waxed eloquent abouthow India was the fastest growing economy in the world, generating seven million jobs a year.
To put all this in context, it was less than just two years ago, in November 2017, that the global ratings agency Moodys upgraded Indias sovereign ratings – an independent assessment of the creditworthiness of a country – for the first time in 14 years.
Justifying the upgrade, Moodys had then argued that the economy was undergoing dramatic structural reforms under Mr Modi.
In the two years since, Moodys has downgraded its 2019 GDP growth forecast for India thrice – from 7.5% to 7.4% to 6.8% to 6.2%.
The immediate questions that arise now are: is Indias economic condition really that grim and, if yes, how did it deteriorate so rapidly?
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One of Indias most celebrated entrepreneurs,the founder of the largest coffee store chain, Caf Coffee Day, recently killed himself,ostensibly due to unmanageable debt, slowing growth and alleged harassment by tax authorities.
Theauto industry is expected to shed close to a million direct and indirect jobsdue to a decline in vehicle sales.Sales growth of mens inner wear clothing, a key barometer of consumption popularised by former Federal Reserve Chair Alan Greenspan, is negative. Consumption demand that accounts for two-thirds of Indias GDP is fast losing steam.
To make matters worse, Finance Minister Nirmala Sitharaman presented her first budget recently with some ominous tax proposals that threatened foreign capital flows and dented investor confidence. It sparked criticism and Ms Sitharaman was forced toroll back many of her proposals.
So, it is indeed true that India is facing a sharp economic downturn and severe loss of business confidence.
The alarm over the economic condition is not merely a reflection of a slowdown in GDP growth but also the poor quality of growth.
Private sector investment, the mainstay of sustainable growth in any economy, is at a 15-year low.
In other words, there is almost no investment in new projects by the private sector. The situation is so bad that many Indian industrialists have complained loudly about the state of the economy, the distrust of the government towards businesses andharassment by tax authorities.
But Indias economic slowdown is neither sudden nor a surprise.
Behind the fawning headlines in the press over the past five years about the robustness of Indias growth was a vulnerable economy, straddled withmassive bad loans in the financial sector, disguised further by a macroeconomic bonanza fromlow global oil prices.
Indias largest import is oil and the fortuitous decline in oil prices between 2014 and 2016 added a full percentage point to headline GDP growth, masking the real problems. Confusing luck with skill, the government was callous about fixing the choked financial system.
To make matters worse, Mr Modi embarked on a quixotic move in 2016to withdraw all high-value banknotes from circulation overnight. This effectively removed 85% of all currency notes from the economy.
This move destroyed supply chains and impacted agriculture, construction and manufacturing that together account for three-quarters of all employment in the country.
Before the economy could recover from the currency ban shock, the government enacted a transition to anew indirect taxation system of the Goods and Services Tax (GST)in 2017. The GST rollout wasnt smooth and many small businesses initially struggled to understand it.
Such massive external shocks to the economy, coupled with a reversal in low oil prices, dealt the final blow to the economy. Millions of Indians started to lose their jobs and rural wages remained stagnant. This, in turn, impacted consumption, slowing down the economy sharply.
The wobbly state of the economy has also thrown government finances in disarray: tax revenues are much below expectations.
On Monday, the government got a much-needed breather when Indias central bank announced a $24bn (19bn) one-time payout for the cash-starved government. (This amount is more than the dividend paid by the central bank to the government in all five years of the Congress rule between 2009 and 2014.)
The solutions to the economic crisis are not easy.
Indian industry, fed and fattened with government protection through decades, is once again clamouring for tax cuts and financial incentives.
But it is not clear that such benefits will revive private sector investment and domestic consumption immediately.
For all the hype about theMake in India programme, hailed as the harbinger of the countrys emergence as a manufacturing power, Indias dependence on China for goods has only doubled in the past five years.
India today imports from China the equivalent of 6,000 rupees ($83; 68) worth of goods for every Indian, which has doubled from 3,000 rupees in 2014.
Indias exports have remained stuck at 2011 levels and not grown.
So, India is neither making goods for itself nor for the world.
Ornamental tax and other fiscal incentives to specific industries are not suddenly going to make Indian manufacturers competitive and stop Indias addiction for affordable Chinese goods. If any, the trade spat between China and the United States only saw countries such as Vietnam and Bangladesh benefit and not India.
More currency or trade tariffs are not the solutions either. The central bank has lowered interest rates and there is some push to lowering the cost of capital for industry. But again, Indian industry will invest more only when demand for goods and services increases. And demand will increase only when wages increase, or there is money in the hands of people.
So, the only immediate solution for India seems to be to boost consumption through a stimulus given directly to people, in the classical Keynesian mould.
Of course, such a stimulus should be combined with reforms to boost business morale and confidence.
In sum, Indias economic picture is not pretty.
It is important for Indias political leadership to see this not-so-pretty picture and not hide behind rose tinted glasses. Prime Minister Modi has a unique electoral mandate to embark on bold moves to truly transform the economy and pull India out of the woods.
Praveen Chakravarty is a political economist and a senior member of the Congress party
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