ALL observers—the government, the corporate sector and independent analysts—are unanimous that the Indian economy has been on a downswing. The differences are in the characterisation of the slowdown in terms of the nature, sources, intensity of impact and the measures for revival. That the gross domestic product (GDP) growth rate in the first quarter of 2019-20 (April-June 2019) fell drastically to 5 per cent (the lowest in the last six years) made a big splash in the news and made the Central government grudgingly accept the problem. The Reserve Bank of India (RBI) in its Annual Report 2018-19, released this September, makes clear the pace of growth decline and the causes behind it. The RBI observed that the annual average GDP growth rate, which was 7.7 per cent during 2014-18, increased to 8 per cent in April-June 2018 but from July 2018 shed the momentum, and the decline deepened “with a knock on manufacturing and net exports”.
It emphasised that the “bedrock” of growth was domestic demand and capital investment. Aggregate demand weakened because agricultural growth decelerated from September 2018. There was excess supply conditions in agriculture with piled up buffer stocks. International agricultural prices declined adversely, affecting exports. All this together depressed farmers’ income, pulling down rural demand. Capital investment, which had been on the decline since 2016-17, had a further dip because of negative sentiment caused by a slide in manufacturing as enterprises looked to clear excess capacity. At the end of this fairly detailed analysis, the RBI (for reasons better known to it) leaves the characterisation of the slowdown vague by hinting that it is difficult to diagnose what kind of slowdown it is: a “soft patch”, “cyclical” or “structural”?
The objective of this paper is to go a step beyond and to show by using data of the RBI and other government agencies that the present slowdown is not a “soft patch”, not even “cyclical”, but substantially “structural” partly because of the way demand-side problems associated with incomes and employment have been ignored and mostly because of wrong policies like demonetisation, undue haste in pushing the complex goods and services tax (GST) system down the throats of millions of small enterprises, and undue tax concessions and privileges to the corporate sector with adverse consequences on public expenditure and aggregate demand.
Fall in Capital Formation, public investment
Let us examine broad trends in gross investment, employment and aggregate demand over the last few years. First, we shall examine the trends in overall savings and investment, or gross capital formation, and then turn to investment in terms of its components, that is, public investment and private corporate investment. Gross domestic savings comprise three broad components: public, corporate and household saving. Gross domestic savings, which stood at 34.6 per cent of the GDP in 2011-12, has been on the decline. In 2015-16 it was 31.1 per cent and by 2017-18 it declined further to 30.5 per cent. The entire decline in domestic savings was owing to a decline in household savings from 23.6 per cent to 17.2 per cent of the GDP during the period. This clearly reflects the downward pressure on household incomes. Investment (gross capital formation) suffered a much steeper decline, from 39.6 per cent of the GDP in 2011-12 to 32.1 per cent in 2015-16 and further down to 30.9 per cent in 2017-18.
In a developing country like India, public investment plays a critical role not only in generating employment and income but also in stimulating private investment. A rough-and-ready indicator of public spending impacting overall demand is seen in terms of its ratio to the GDP. The Central government’s overall expenditure, which stood at 15.4 per cent of the GDP in 2014-15, experienced an abrupt fall to 12.5 per cent by 2017-18 and further down to 12.2 per cent in 2018-19. There is a long-term decline in public expenditure, including welfare spending.
For instance, there was reduction in the budgeted expenditure for 2019-20 even on core flagship programmes such as the National Social Assurance Programme and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). A close look at the trend in the Budget shows that the government in its anxiety to log points on “ease of doing business” seems to be resorting to tax concessions to corporate and foreign investors and compromising on public investment.
For instance, corporate tax was reduced to 25 per cent from almost 35 per cent. Incentives, concessions and tax exemptions were increased by 16 per cent from about Rs.84,000 crore in 2017-18 to about Rs.1,09,000 crore in 2018-19. There has been a continuous increase in tax arrears from Rs.5.8 lakh crore in 2013-14 to Rs.11.1 lakh crore in 2017-18, and the Comptroller and Auditor General’s (CAG) report observes that 98 per cent of it is in the category of “difficult to recover”. The haste and complex manner in which GST was introduced not only worsened indirect tax collections but also crippled investment and employment in small enterprises. At present, there are about 1.39 crore GST assessees, but 95 per cent of the tax is paid by big units comprising 5 per cent of the assessees. Almost 86 per cent of the units are small enterprises with a turnover of less than Rs.2 crore a year. For these small units, there are issues of concern with bifurcation of inputs into different categories and vendor-wise bifurcation of inward supplies, and these units struggle with their returns. The core of the GST design is the “invoice matching system”, which has not been put in place so far. There is a need to exempt these units until the systems are streamlined and the rates are rationalised. But the proportion of GST filings has been on the decline, and the total GST realised had touched a 19-month low by September 2019.
At a time when there is need to raise tax resources and increase public expenditure in order to revive domestic demand and stimulate growth, the government is riding on the false hope that tax cuts and incentives will revive the corporate sector’s “animal spirits”. There are false promises that there will be investments amounting to Rs.100 lakh crore in infrastructure in the next five years. Even fake announcements could not be so far from reality.
Corporate Investment
The government has chosen to ignore the criticism of demonetisation and refuses to accept the devastating consequences it had on the employment and incomes of especially those who were dependent on the unorganised sector, which accounts for about 40 per cent of the GDP and almost 90 per cent of employment in the country. But there are several independent evaluations showing the crippling impact of demonetisation that sparked the present economic decline. According to the Centre for Monitoring the Indian Economy, an estimated 1.5 million jobs were lost, thousands of units were shut and investment declined steeply in the informal, or unorganised, sector.
It is well known that there are strong inter-sectoral linkages between the unorganised sector and the organised sector. Loss of jobs and income in the unorganised sector affects demand for the organised sector and acts as a disincentive for investment by the organised corporate sector. This is what is revealed by the Report of the Taskforce for Drafting New Direct Tax Legislation, which was appointed by the Central government in November 2017 to suggest measures to simplify direct tax legislation. It submitted its report in September 2018. But the government has been delaying its release because some of the findings are not to its liking. This is not the first time the present government has held back reports. The same thing was done with the report of the Periodic Labour Force Survey 2017-18. Just as in the case of the PLFS, the task force report was leaked, and it is public knowledge now.
The task force compiled, on the basis of corporate statutory disclosures, aggregate yearly corporate investment for seven years, from 2010-11 to 2016-17. The data show that the total corporate investment as a share of the GDP declined gradually from 15 per cent in 2010-11 to 2014-15, but the decline accelerated in 2015-16 to 7.5 per cent and fell steeply to 2.5 per cent in 2016-17. This serves as incontrovertible evidence that the adverse impact of demonetisation is not a partial story of decline in just the unorganised sector but is as much a story of the organised sector.
What is to be noted is that since 2013-14 profit-making companies retained substantially more earnings than they reinvested. Corporate investments remained virtually stagnant despite sufficient retained earnings. Even as every industrial and trade organisation, even those dealing with consumer durables and cement, reported a sharp drop in sales on account of demonetisation, the government was busy directing upward revision of the growth rate, from 7.1 per cent to 8.2 per cent in 2016-17.
There was yet another aspect to private corporate investment, especially in infrastructure, which has its neoliberal footprint from the earlier Congress government, too. Earlier, there were special development finance institutions like the Industrial Finance Corporation of India, the Industrial Development Bank of India (IDBI), the Industrial Credit and Investment Corporation of India and State industrial finance corporations to provide long-term finance to the corporate sector to enable it to undertake infrastructure and industrial development requiring long-term gestation or completion period. Since the shift to the neoliberal regime and as a part of the banking sector reform, most of these “development finance” institutions were either shut or reduced to being commercial banks not designed for long-term lending. Since the early 2000s, commercial banks’ share of long-term infrastructure lending increased from 3 per cent to 30 per cent. Since the completion and returns from infrastructure projects experienced delays, the loan repayment defaults started mounting. Between 2015 and 2018, the non-performing assets (NPAs) of commercial banks mounted from Rs.3.23 lakh crore to Rs.10.36 lakh crore, resulting in write-offs, underwriting of losses, and recapitalisation of banks, which alone cost the government Rs.2.46 lakh crore.
Agricultural distress
For more than two decades, agriculture, especially involving small-marginal farmers, has been passing through considerable instability and, often, distress. The annual agricultural GDP growth rate, which averaged at 4.3 per cent during 2010-14, declined to 2.9 per cent between 2015 and 2019. There has been a disconnect between agricultural growth and farmers’ welfare. This is largely because growth in farm output is achieved with growing capital cost per unit of output. Public investment in agriculture has drastically come down since the beginning of neoliberal reforms, and 80 per cent of capital investment is borne by farmers. But in recent years, especially from 2016-17, profitability is under squeeze. Agricultural prices are under downward pressure and in most of the cases rule much below the minimum support price. Agricultural exports, which reached a peak of Rs.3 lakh crore in 2013-14, have been experiencing negative growth in the past five years, and agricultural investment as a share of agricultural GDP declined from 18.2 per cent in 2011-12 to 13.8 per cent in 2016-17.
There have been tall claims by the government on “doubling of farmers’ income” between 2016 and 2022, and the Bharatiya Janata Party’s (BJP) manifesto of 2019 proclaimed that Rs.25 lakh crore, an average of Rs.5 lakh crore a year, would be invested in agriculture in the next five years. And all that happened was a Budget provision of Rs.53 crore for 2019-20. This includes a measly allocation of about Rs.8,000 crore for agricultural research and development, which is half of what a private company like Bayer spends in a year on research. The sum of Rs.6,000 in three instalments that is supposed to come to rural farmers under the PM-Kisan Samman Nidhi (PM-KISAN) is hardly 6 per cent of the average annual income of a farm household. With the accumulated buffer stocks of foodgrain in excess of the norms required for public distribution, with the depressed global prices and with the expected output on a par with the previous year, agriculture is in a state of surplus supply that will further squeeze farm incomes and overall rural demand.
A major dark side of the so-called high trajectory of growth under the neoliberal regime has been “jobless growth”. But given the predominance of the informal sector, especially agriculture, increasing numbers from the labour force were absorbed in some form of thin employment, leaving substantial proportions of the employed camouflaged and making the rate of unemployment look very low at 2 per cent for many years until 2012. But the PLFS 2017-18 (PLFS 2018) revealed that this is no longer the case and that there has been a continuing massive decline in agricultural employment, that growth of non-agricultural jobs has been too small, and the rate of unemployment has reached record levels (the main reasons for the government’s delaying of the PLFS 2018 report until after the 2019 Lok Sabha election results). For the first time in the history of independent India, there was a net decline in the total employment in the country, from 472.5 million in 2012 to 471.3 million by 2017-18.
The structural shift in employment from agriculture, which started during 2005-12 with the decline of a massive 34.4 million jobs, continued with a loss of 27.1 million agricultural jobs during 2012-18. But during 2005-12, there was also a substantial increase in non-agricultural employment, especially with as many as 19 million jobs in the construction sector. During 2012-18 along with the decline in employment in agriculture, the manufacturing sector also suffered one million job losses, and the construction sector contracted with a measly addition of only 1.6 million jobs—these were essentially owing to the adverse effects of demonetisation and complex GST measures. The result was an unprecedented increase in open unemployment, from 10.5 million in 2012 to 30 million in 2018, an unemployment rate of 6.1 per cent, the highest in the last 45 years.
Sharp Decline in Demand
The lack of growth in employment and the loss of jobs in many sectors apart from agriculture and the resulting loss of income have affected domestic demand severely. In addition, according to the Labour Bureau, there has been deceleration in the growth of wages in the last five years, resulting in falling consumption demand. There was resistance on the government’s part to revising minimum wages. There have been deliberate attempts to keep the minimum wages low.
For instance, the government appointed an Expert Committee on Determining the Methodology for Fixing National Minimum Wage. Its report, which was submitted in January 2019, recommended a methodology according to which the minimum daily wage works out to be Rs.375. But the government declined to accept the recommendation. When it legislated in favour of the Labour Code on Wages in July 2019, the government arbitrarily fixed a minimum wage of Rs.178 a day.
The relative prices of agricultural commodities have been experiencing a decline since 2018-19. With a decline in farm output prices and an increase in input prices, the average income of small-marginal cultivators has been worse than that of casual wage workers. The results of consumption expenditure in some of the National Sample Survey Office surveys of 2014-15 and 2017-18 show that there was an actual decline during this period: from Rs.1,587 a month per person to Rs.1,524 in rural areas and from Rs.2,926 to Rs.2,909 in urban areas. All this makes it clear that there has been stagnation bordering on a decline in domestic demand. The problem needs to be addressed forthwith.
The BJP government came to power in 2014 accusing the former Congress government, among other things, of “policy paralysis”. But the experience with this government in the past five years, and in its present term, shows that some of its policies appear to result in economic paralysis, as evident from demonetisation and GST. A host of measures announced recently, like tax concessions, bank mergers or disinvestment, do not hold much promise of stimulating fresh investment, employment or additional demand.
For instance, withdrawing the surcharge on the dividends of foreign portfolio investors may not lead to much inflow of foreign capital to improve the performance of market capitalisation under conditions of underutilisation of capacities. Extension of a reduced corporate tax of 25 per cent to all companies regardless of their turnover limits of Rs.400 crore as proposed earlier in the Budget, a steep reduction in corporate tax down to 15 per cent in the case of new investments, and withdrawal of Minimum Alternate Tax are measures that seem to demonstrate that India is one of the least taxed countries in the world with a no-holds-barred readiness to score points on “ease of doing business”.
There are so far no estimates whether an improved rank in “ease of doing business” has actually brought about additional flows of direct investment to create more employment and increase domestic incomes.
The crisis in the banking sector by way of asset quality deterioration and NPAs are, besides the political influence and corruption that continued from the Congress regime, caused by the destruction of development finance institutions under the neoliberal regime and the forcing of commercial banks to play the role of long-term lending for infrastructure and industrial projects. Forcing a financially sound public sector institution like Life Insurance Corporation of India to invest in loss-making public sector banks like IDBI Bank and Oriental Bank of Commerce only resulted in heavy losses to LIC but not much of improvement in these banks.
Similarly, the merger of 10 public sector bank into four with a view to achieve improved performance is of doubtful value. The negative experience of the policy of “too big to fail” elsewhere in the world is a clear indication that large size is no guarantee of efficiency in banking. But the merger experience of State Bank of India (SBI) shows it will result in reduced employment and closing down of branches in the name of rationalisation. The adverse effect may be more on small and medium enterprises and rural credit. The RBI data show that the credit growth of SBI after merger declined from 14.2 per cent in 2017 to 11.6 per cent in 2018.
Disinvestment in profit-making PSUs
At a time when the need is to undertake public investment that would stimulate private investment and help generate more employment, the government is setting a massive target of Rs.1 lakh crore for disinvestment across sectors ranging from sound profit-making railway operations to thermal power plants, besides several operations of Coal India, and more than 250 items of production under Ordnance Factories and organisations. Disinvestment per se does not create any fresh employment, production or incomes unless the resources thus mobilised are earmarked for fresh additional investment. But the present government, with liberal tax cuts and concessions estimated at Rs.1.4 lakh crore, would use the earnings from disinvestment to fill its growing fiscal deficit. Besides, past experience of divestment in public sector undertakings (PSUs) shows that reservation policies have been given a go-by by these units post privatisation. Also, in these privatised units there has been increasing contractualisation of labour, eroding security of employment. These measures only add to the depressed employment and income situation.
The Way Out
Ever since evidence coming out from official sources such as the RBI, the Central Statistics Office, the PLFS, the Ministry of Labour and Employment, the Ministry of Finance and the CAG confirmed a slowdown, most independent researchers and even some private rating agencies have been unanimous that investment and domestic demand have taken a beating and that the solution lies in addressing these issues in order to stimulate growth with increasing employment and incomes. These measures could broadly be divided into three groups.
The first is the removal of institutional obstacles, for example the rationalisation and simplifying of GST. Small units could be exempted until voucher-matching systems are finalised. Further, this category would include quick refund of all input taxes under GST and rebate on Central and State taxes for the entire textile chain and engineering goods to promote exports. Because of the trade conditions between the United States and China, there are many enterprises from China looking for alternative locations. But India has not done much to attract these investments; many electronics firms are relocating in Vietnam, manufacturing firms in Thailand and Indonesia, and clothing companies in Bangladesh.
The second set of measures suggested comprises massive increases in infrastructure investment by the government and the provision of more incentives to job-intensive sectors such as textiles, automobiles and affordable housing. The revival of micro, small and medium enterprises needs prioritisation to generate more jobs.
The third set of measures would directly impact rural incomes and demand: restructuring and augmenting resources for the MGNREGS, and direct and augmented assistance to small-marginal farmers under schemes such as the PM-KISAN in coordination with the State governments. The other intervention is in the social sector, particularly through improving resources for public health and public education facilities.
Selling false dreams
Instead of earnest efforts to revive domestic demand through growth with the focus on employment, the state is announcing programmes that sound more like false dreams. For instance, there was a “declaration” that farmers’ incomes would be doubled between 2016 and 2022. What we see is continued stagnation in farmers’ consumption standards. There was a claim made with much fanfare that there would be Rs.100 lakh crore infrastructure investment in the five years from 2019, that is, Rs.5 lakh crore each year. But the reality is that there is hardly one-tenth of that in the very first year.
Now the government is riding on another monumental false promise that India will become a $5 trillion economy by 2024. It is a different matter that there are no such signs, but if it becomes possible by a miracle, with the present level of inequality that ensures that with every rupee of increase in GDP, 66 paisa goes to the top 10 per cent of rich households, only 23 paisa to the next 40 per cent of the middle class, and a measly 11 paisa to the bottom 50 per cent of the households, the question that stares the country in the face is, for whom does this $5 trillion roll out?
D. Narasimha Reddy was formerly Professor of Economics, University of Hyderabad.
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