Indian Historical Economic Crunch- Who is to Blame?

After Independence from the British Union in 1947, India chose to remain a non-aligned (being founder of the non-aligned movement in Yugoslavia), Socialist and economically protectionist economy with heavy tariffs levied on foreign investment, import of goods and economic exchanges. India became a patron of Soviet Socialism, Communism and, along with its democratic system, alluded to the image of then politicians, especially Nehru. The Indian National Congress consolidated its power on a short term narcissistic vision of populism combined with soviet socialism which fostered red-tape bureaucracy, corruption and ‘Neta Raj’. Other nations such as Japan, South Korea and Singapore; who started their economic journey in lieu with India’s, marched forward tremendously in economic growth, prosperity and HDI. Conscience dawned on the India inc. in 1991 when then prime minister P.V. Narashima Rao and finance minister, the ‘Oxford stalwart’ Mr Manmohan Singh liberalised the Indian economy in the wake of the 1991 Financial Crisis. Since then, India’s GDP has almost tridecapled in 29 years from 226$Billion USD to 3.02$Trillion USD (as of March 2020) with a CAGR (Compounded annual growth rate) of 9.36 %( apx.), until the Coronavirus pandemic hit the Indian economy with all guns blazing. The 2nd quarter (April-June) contraction came in at -23.6% as per RBI with the IMF’s Gita Gopinath suggesting a grimmer -25.6% contraction in the Indian economy. It was already ailing from a government-induced slowdown by 2019 when it grew at a lethargic pace of 5.5 %( FY 19–20).The last quarter of 2019 recorded a GDP growth of 4.5% and the Q1 of 2020 recorded an abysmal low of 3.1%, the lowest in 13 years. So how did this historical economic crunch come into being and what contributed to it?

How devastating is the economic contraction?

Let us take our own Prime Minister’s clarion call into account. Modi promised to make India a 5$Trillion USD economy by 2025. Albeit the Coronavirus pandemic hitting the economy, considering a scenario sans it by the data of March 2020 before the nationwide lockdown was announced, India needed a CAGR of 11.2%(apx) to reach a 5$trillion dollar economy by 2025 in contrast to a CAGR of 7%(apx.) for a period of 6 years (2014–2020); when India transformed from a 2$trillion to a 3$trillion dollar economy. However, after the Coronavirus pandemic hit the Indian economy and the second quarter contraction came in at -23.6 %( As per RBI) Indian economy devalued to 2.31$Trillion (apx) USD at the end of June. With the third-quarter GDP data yet to come, initial reports suggest that exports declined by 10.21% in July, the fifth straight contraction to 26.33$billion USD. Imports have also contracted by 28.47$Billion USD in July. The surplus of 790$Million USD in June was replaced by a deficit of $4.83 billion in July. We are staring at an even grimmer picture of the Indian economy with another contraction in the 2nd Quarter which will push the GDP to ‘abysmal’ lows and India into a recession officially. This is perhaps India’s sharpest contraction since 1979–80 when the GDP contacted by -5.2% of GDP. However with the annual (2020–21) possible contraction in the most liberal estimates relying on the figures given by IMF i.e. -4.5%, India will need to grow at an inconceivable CAGR of 15.09% for a period of four years. Even if India averages a CAGR of 9.36% for 4 years, it would be a 4.08$trillion (apx.) by 2025 and a 6.38$Trillion (apx.) economy by 2030 in contradiction with Niti Ayog’s goal of a 9.1$Trillion dollar economy by the same year. India is thus staring at a ‘lost decade’.

Indian economy before Covid-19.

India was already reeling from an unprecedented economic slowdown due to the policy paralysis and political goal scoring by the government. The populist measure of demonetisation and a hasty GST implementation were “satte pe satta” on the Indian economy. The demonetisation was a massive failure which robbed the Indian GDP of 1.5 %( 8.26 in 2016–7.04% in 2017) growth points and only 0.7% of the monetised currency i.e. 10,720 crores out of 15.41 lakh crores didn’t reach the banks; about 15 crore daily livelihood workers lost their jobs, Indian economy lost 2.5 lakh crores on monetary gains and 100 people lost their lives. Small MSE (Micro and small enterprises), Farming Industry (Growth slowed to a four year low of 6.7%) and the unorganised sector which mostly relied on cash payments and operated by currency modules were devastated. Credit financing was hampered. Consumer demand dropped by around 40%. Unemployment rose to an all time high of 6.1% in 45 years in 2017–18; around 2016–2018 around 5 million people lost their jobs. The impact of demonetisation was felt by the Indian Economy even after 2 years of the implementation as said by IMF in 2018. However the number of taxpayers increased by 25% in 2017–18; which is still minuscule considering that only 1% of the Indian population pays income tax. Demonetisation completely failed to curtail black money, its numero uno objective. Upon being cornered on this very issue, the government protracted in addressing the concerns in the economy and defiantly highlighted the increase in digitization of payments; decrease in hawala transactions; and decrease in funding of terrorism. However, since demonetisation 99% of the cash is back in circulation; India climbed a place up in world terrorism rankings in 2019(from 8th to 7th) with 748 major terror incidents according to Global terrorism index; and digital Payments had already hit pre Demonetisation levels way back in June 2017. When the economy was already reeling from the perils of demonetisation, the government brought another impediment which cemented the already induced slowdown in Indian economy: ‘The GST Act’. Many might argue that a structured slab rate and uniformity in tax slabs was a much needed reform but a ‘hasty’ and ‘incomplete’ GST added to the woes of a ‘wounded’ market. Demonetisation was already eating into GDP growth when GST came into being in 2017. GST had 4 different rates of tax slabs (5%, 12%, 18% and 28%), in addition to that there is the exempt category (0%) and additional cesses which are charged on certain products which makes our GST to have seven effective tax slabs in comparison to other countries such as Brazil, Germany, Singapore and Malaysia which have either a single or dual effective tax slab system. Additionally the haste in which the new tax regime was employed caused major confusion in the MSE sector, the biggest entrepreneurial sector of India. The government also kept changing the items under various tax slabs and slashed tax rates. The government for political considerations ensured that the GST was quite similar to the erstwhile centralised tax system prior to GST. The collections under GST have been underwhelming since its implementation with the government failing to meet its fiscal deficit targets every year. Many states as West Bengal, Andhra Pradesh, Tamil Nadu, Kerala, Punjab etc. reported loss in revenue as the tax system was centralised by the Central Government and the states had to depend on the centre which effectively curtailed state spending owing to fiscal deficit and hampered state sovereignty. The states had to borrow from the state PSUs and market to meet budget shortfalls; which led to increase in state debt (RBI report in 2019). To meet GST shortfalls the governments of state and centre have increased taxation on petroleum with centre pushing excise duty on petroleum by 150% since July 2014 despite historically low crude oil prices; affecting mobility and spending of 60% of Indians who live on 3.10$ dollar a day /7000Rs a month roughly; already reeling from the credit crunch induced by demonetisation. A major consumer base thus was effectively quashed by the government which led to a slowdown in consumer demand. In March 2019 an economic report by the Ministry of the Economic affairs admitted the cool down in growth owing to decline in private consumption, weak increase in fixed investments and muted exports as the reasons for the economic slowdown in India. Such was the extent of slowdown in that even the sale of Biscuits (Parle and Brittania) posted historic declines; gold consumption tapered by 36% in the first quarter of 2020 against the global rise of 1%. Even the Aspiring Middle-Class, the growth drivers of the Indian economy began calculating their budgets and spending. Thus the Indian economy collectively took a hit from demonetization and GST. Exports declined 1.8% in December 2019 with 19 out of 30 major sectors seeing a contraction for the fifth consecutive time. Outbound trade contracted the sixth consecutive time out of the first nine months in FY 2019–20. Imports contracted by a whopping 8.8% as in December, the 7th consecutive time in FY 2019–20. This reflected a slowdown in consumption and thus the corollary in industrial items as well. The government was also afraid to spend more borrowing from the market, afraid of the potential downgrade by credit agencies. Unemployment hit an all time high of 9 %( highest in 45 years) in March 2020 and thus India Inc. grinded to a halt owing to mismanagement, political goal scoring, chest thumping by the government and the sheer arrogance of it.

Covid 19’s impact on the Indian economy and the late response of the government.

India imposed the strictest lockdown in the world on March 24, 2020 to contain the spread of the Coronavirus when the nation was reporting cases in tens. The lockdown was partially lifted from July 8 in phases; the initial being Unlock 1.0 and the recent being Unlock 4.0 on September 2. The 133 days of lockdown was imposed on the Indian economy which already was slowing down drastically; and the results of it? Exports fell by -36.65% years on year; Imports fell by -47.36% as compared to April 2019; India’s fuel demand declined to 80–85% of the pre pandemic levels; 10% of farmers couldn’t yield their crops and those who did yield, 60% of them reported a yield loss; manufacturing contracted by 23.9%; unemployment rate fell to 8.4% and overall employment rate slid to 37.5% as of August 2020; labour force rose to 428 million; 130 million jobs could be lost according to a report by Global Consultants and overall consumption tapered by 15%. The government response came in a little too slow to mitigate the bloodbath of the Indian economy. The government’s 20 lakh crore economic package was also criticised by many economic experts like Raghuram Rajan, the former RBI governor who said that “The government needs to pull all the stops…the challenge was not just to repair the damage done by the Coronavirus and the lockdown but also the preceding three-four years of economic drift”. Some even assessed the real package to be around 1–3% of the real GDP in contrast to 10% as claimed by the government. Realising the real extent of the damage of Covid-19, the government is mulling a second economic package; experts say it’s a little too late with some estimating that India might need the second stimulus to be 5–10% of India’s GDP to support India’s covid recovery by August, when the general financial budget will be ready. All hopes are pinned on the Monsoon session of the Indian Parliament now. The National Infrastructure Pipeline of 1.43$ Trillion announced by the government over a period of five years (2020–25) also failed to enthuse any glee. Increasing Coronavirus cases are also dimming the prospects of economic recovery and increasing its prolonged bloodbath. On 3rd September, 83,883 Coronavirus cases were recorded in India, setting the world record for the most number of Coronavirus cases in a day. India is the third worst affected country in the world with 3.94 million cases as of September 4. The most Industrial and prosperous states of India- Andhra Pradesh, Karnataka, Tamil Nadu, Maharashtra, Gujarat, Delhi NCR and Telengana- account for nearly 60% of India’s Covid cases.

Who can we now blame for the twisted fate of the Indian economy? Let the article speak, and you decide.

(Sources- Business Standard, Statistics Bureau of India, Finance Ministry, Financial Times, Economic Times, NDTV, The Wire and The Hindu).