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Indian Economy: Report Card 2017

  The NDA government will come up for re-election in 2019, which is barely 16 months away. At this crucial juncture when speculations are rife about the competency of the current government, let's analyse the economic fabric of our country.  

Dr Suresh Srinivasan

There have been widespread speculations in the media complaining on the worsening economic health of the country, in recent times. Allegations have been pointed at the Prime Minister and the ruling NDA government that key economic parameters are not in the best of shape. To the embarrassment of the government, BJP's senior members including the former finance minister Yashwant Sinha and other leaders like Arun Shourie have voiced negative concerns on the Indian economy and the leadership of Prime Minister Narendra Modi.

Is the Indian economy in a really bad shape?

The government has time and again confronted such allegations and has tried to paint a positive picture. The government has not admitted to the fact that the economy has in fact deteriorated. The question is, what's the real picture? Has the economy flattened? Is there a concern? This is a very pertinent question since, the current NDA government came to power during May 2014 with a wide range of promises and that included sorting out the dwindling economic situation of our nation.

At this point in time, when the Opposition is keen to ride on the vulnerable state of affairs of the nation, how can 'quick wins' be demonstrated in such a short span? However, given the current situation, sorting out these issues would be the most important priority for the government. Let us go over some of the issues that are glaring in the face of our country now.

The current economic issues

The NDA government inherited a poor economy in 2014 that was growing at 5.3% on a quarterly basis. The first quarter when the NDA came to power, was filled with positive sentiments and the growth climbed up to 8.8%. Over the next few quarters it steadily dropped down to 7.25% and eventually rose to 9.13% in March 2016. From then on, over the next five quarters, growth has steadily dropped down to 5.7% by June 2017.

Introduction of new reforms

November 2016 saw the demonetisation initiative and July 2017 saw the introduction of the Goods and Services Tax (GST). These two structural reforms had resulted in widespread uncertainties and the overall sentiments turned tentative. Liquidity in the markets was seriously impacted and growth was stunted.

By August 2017, the sentiments had turned quite negative. All vital economic parameters were looking weak.

  • Demand was not picking up.
  • Private investments virtually tanked.
  • Consumption and consumer sentiments were at an all time low.
  • Employment generation was nowhere close to what the economy needed.
  • Corporate results were significantly impacted.

Biggest casualties of demonitisation

Construction and infrastructure sectors were the biggest casualties of the effect of demonitisation. And, this in the long run had a wide ranging impact on the entire economy.

  • Gross fixed capital formation nosedived.
  • The growth in the Index of Industrial Production (IIP) steadily declined.
  • IIP virtually halved to 2.6% by the end of 2016 from 5.5% before demonetisation.
  • Bank credit showed a decline.

The root cause of the problem

Disruptions that had erupted after GST had been implemented are known to be ubiquitous, in many countries of the world. For example the British Colombia province of Canada abandoned the newly introduced harmonised tax regime through a referendum. Implementation glitches and misinformation by the Opposition were the main reasons.

How GST led to widespread problems

Over the last three months, implementation of GST in India has created wide spread problems, where multinational companies to small and medium sized traders continue to suffer. The massive system migration clubbed with GST technical glitches, be it filling tax return and securing timely refund of duties or crashing of the tax portal, have been the order of the day. Some of these have resulted in blockage of cash flows and small businesses are facing the heat.

The other major problem is the GST rate slabs and classification of items in these slabs. The common complaint has been that many of the items used by the common man are classified in slabs that attract high duties. Items like cement and paints are now attracting the highest slab of the tax rate. Branded food grains that are consumed by common man, now attract GST at 5%.

Already some good news is flowing in

The last week of September is witnessing a wave of optimism. Slowly, the problems of the major reform programmes like demonetisation and GST seem to be dying down, albeit slowly, giving way to some positive word of mouth and improved sentiments. Recent economic data is quite positive. In September 2017 the IIP started showing signs of steady improvement and moved to a 10-month high.

In essence, when it came to the question of enacting the Goods and Services Tax (GST), the governments, both past and present, did not have a choice. GST had to be implemented and the country's complex indirect tax structure had to be simplified. The issue boiled down to, which government would take the risk of implementing GST, especially given the quantum of 'change management' involved and the potential backlash in the short term.

What the future holds?

Well, with the state of affairs of the nation amply demonstrated, it is for sure going to be a gamble, in the state and central elections, which are not far away. It will be important to see how quickly the government machinery is in fact recovering from such problems, which are plaguing it currently. But unquestionably GST is the way to go, given the longer term benefits, which it provides.

Long term benefits of GST

Although in the short run, GST implementation can create chaos, over the long term, benefits in terms of strong government finances cannot be disputed. Expanding the tax net resulting in enhanced tax revenue, ease in tax collections and reducing the administrative costs are some of the clear long term benefits. Movement of goods across the country would become much quicker and cheaper through smoother logistics. All of these are expected to result in the ease of doing business in the country. It is expected that once the initial glitches of GST implementation are smoothed out, GST can have a 1% to 2% impact on the country's gross domestic product (GDP).

The GST council has already started to address many of these problems reclassifying a number of items. The technical functioning of the portal is also reported to be improving over the last few days. However a lot more seems to be required to ease the problems of the business and in that regard, a comprehensive relook at the GST law seems inevitable!

The government should find the most efficient way of communicating this to the voting public to convey such a key message that such measures have longer term benefits for the economy. Will they be able to do this? For sure the government will try its best to do the same. Will this message effectively reach the public? Will they understand the implications? Time only will tell!