stick to reforms at all cost
The GDP rate had started to drop even before demonetisation
Is there a limit to how much reform an economy can take? The June quarter GDP figures have surprised many by registering 5.7%, the lowest growth rate since Prime Minister Narendra Modi was elected. The continuing fall in industrial production, down to just over 1% growth, was largely to blame. Critics have been quick to blame demonetisation and the introduction of the goods and service tax (GST). The new bankruptcy code and the cleaning up of the real estate sector are also darkening the horizon. There can be no doubt that all of these have had a role to play, but it is also true India’s GDP growth rate had started to droop even before demonetisation. As is normally the case, there are multiple reasons for what afflicts the economy. But slowing down on reforms is not the solution.
It should not be forgotten that one of the key drivers of growth before 2008-09, exports is now a shadow of what it once was. The banking sector crisis and corporate debt problem were legacies of the past government. The NDA’s decision to go ahead with structural reforms despite these conditions was commendable. Demonetisation, GST and real estate reforms will reduce the cash-based informal sector of the economy — as much as half the country’s GDP. The end result of this will be a greater formalisation of the economy which will mean better productivity, better quality jobs and higher tax revenue — all of which in time will serve the Indian economy for decades to come. But the disruption of the informal sector as well as the teething problems regarding GST will inevitably bring about short-term pain to the economy in the form of job losses, fall in demand and contraction of industrial activity.
The real danger for India is that the government with a number of elections looming may decide to slide back into populism. As it is, the NDA’s political narrative of being untainted by corruption has made it reluctant to use State funding to resolve the bad loan problem among the banks. There is, however, some silver lining in the latest round of statistics. There is some evidence of corporations improving their financial conditions and signs of a real estate revival. The Centre’s real plan should be pushing forward its digital and financial inclusion plans, and sorting out the regulatory problems that continue to make India such a difficult place to do business.