GOING OFF TRACK
The jobs crisis, bank loans mess and farm distress have combined to drag down the economy. The Modi government’s image reflects its faltering performance
WITH JUST MONTHS TO GO before the general election, the Indian economy isn’t looking as rosy as the Narendra Modi-led BJP government would have wanted. Despite the move to a purported simpler tax structure through the Goods and Services Tax (GST), some far-reaching reforms on the financial front through the new insolvency laws and benign crude oil prices for most of its tenure, the government is still grappling with a difficult economy. The situation is all the more bleak considering the government came to power on the promise of putting the battered economy inherited from the UPA government back on track, with the promise of higher growth, more jobs and better living conditions.
The disappointment is amply reflected in the Mood of the Nation (MOTN) survey for January 2019. Though the general view persists that the Modi government’s economic performance has been better than the Congress-led UPA’s, there is a fall in their number. Some 49 per cent respondents still believe the BJP-led NDA government has done better, but the drop of seven percentage points in the past one year is a matter of grave concern. As many as 28 per cent feel the economic performance has been worse, the highest negative score in the past seven surveys. Overall, 41 per cent feel the economic performance is either worse or the same as the UPA government.
What has led to this perception? Well, the economy is expected to grow at 7.2 per cent this fiscal, but there’s no sense of buoyancy all around. Be it the question of jobs, investments or new projects, there is a sense that much more could have been done. Indeed, according to the Centre for Monitoring Indian Economy (CMIE), investments in new projects in the last three months of 2018 was at its lowest since the BJP came to power in 2014. In December 2018, the value of stalled projects stood at over Rs 11 lakh crore, says CMIE. The government’s fiscal deficit has also crossed 112 per cent of the target in these eight months.
A Care Ratings report says there is a high likelihood the Centre will not meet its fiscal deficit target of 3.3 per cent for this financial year. “We expect the slippage to be around 0.1 per cent to 0.2 per cent of the GDP, which would push the fiscal deficit to 3.5 per cent of the GDP,” it says. GST collections have not kept pace and disinvestment targets are still way off the mark.
As in the previous surveys, many respondents feel the prices of essential commodities have risen, although the fact is that inflation is under control, and in some products, such as vegetables, there is even negative inflation or deflation. But the general perception is that prices are up, with 68 per cent respondents saying the costs of essential commodities have gone up in the past five years. An explanation for this could be the fuel prices, which touched the $80 mark in October 2018, before cooling off as global crude prices fell.
There is also a slight fall in the percentage of those who believe their economic status (income and
savings) has changed in the past five years. Although 40 per cent respondents still feel their economic status has improved in the period, there’s been a drop of six percentage points over the last one year from MOTN January 2018.
Corruption continues to be an issue, despite the government positioning itself as a champion of anticorruption drives. As many as 70 per cent respondents say that the corruption they encounter in daily life has not come down and, worryingly, 34 per cent even say it has increased in the past five years.
Jobs, the primary concern
The promise of 12 million new jobs seems to have come back to haunt the government. It has always been said that India does not have a fool-proof way to gauge the number of jobs created. The government has argued that, based on payroll data from the Employees’ Provident Fund Organisation (EPFO) in September 2018, nearly 1 million jobs were created in the formal sector in July. But the veracity of this data has been widely questioned, with some economists saying it should not be confused with employment data, since growth in EPFO enrolments is a reflection of informal labour turning formal. According to the CMIE, over 10 million jobs were lost in the year ending December 2018, while the unemployment rate rose to a 27-month high of 7.38 per cent in December. A good number of jobs lost (83 per cent) have been in rural areas. The MOTN reflected this concern. To a question on whether the government was doing enough to create more jobs, 46 per cent said it was not. However, the number of those who feel the government is doing enough has risen by 5 percentage points to 42 per cent from the previous survey in August 2018. These could be jobs arising from construction activity spurred by public spending on roads and infrastructure.
But the Modi government is well aware that it is way off course on the jobs front, and a massive recruitment drive to fill vacant government positions seems likely. There are more than 2.9 million government vacancies at the Centre and state levels. If the government were to fill these, it could cost over Rs 1 lakh crore and raise the Centre’s salary budget by 76 per cent.
With the 7th Pay Commission formula, minimum pay for an entry level employee will now be Rs 18,000 per month, from Rs 7,000 earlier. Evidently, government coffers do not allow the filling up all vacancies, but sources within the BJP say the party thinks it is a crucial move to counter the jobless growth narrative. The recruitment drive is likely to be a part of a series of big policy announcements targeted at the middle class. The party lost out in major urban centres in the 2018 assembly polls, specifically in Rajasthan, MP and Chhattisgarh. There will be over 70 million first-time voters in 2019 and all they care about are jobs, says a top official.
Tackling black money
A major issue in the 2014 election was black money. Before Modi became prime minister, he vowed to bring back all the black money stashed away in foreign countries. In the past four years, several amnesty schemes were announced—the Income Declaration Scheme which yielded Rs 65,250 crore, the Pradhan Mantri Garib Kalyan Yojana unearthed about Rs 5,000 crore, and the Black Money and Imposition of Tax Act brought in Rs 4,100 crore. Enacted in 2015, it provided a three-month one-time compliance window for people to declare undisclosed foreign assets.
Some 650 people declared foreign deposits worth Rs 4,100 crore. There have been varying estimates of black money. Some agencies peg it at around 20 per cent of India’s GDP. In fact, it was to target black money that the PM announced his most audacious policy move, demonetisation, which rendered nearly 86 per cent of India’s currency illegal. Modi used the term ‘black money’ 17 times during his speech announcing demonetisation in November 2016. The Reserve Bank of India, in its annual report for 2017-18, confirmed that 99.3 per cent of the banned notes had returned as against the overwhelming expectation that Rs 3-4 lakh crore would be extinguished outside the banking system. Perceptionwise, Modi may have lost the battle on black money, as MOTN 2019 shows nearly 46 per cent respondents feel black money is back in the guise of new currency notes. Besides the public sector banks (PSBs), the RBI too is facing a loss of confidence with 43 per cent respondents saying the central bank’s autonomy has been compromised.
The banking mess
Another major finding is the eroding faith inPSBs. The high-profile cases involving diamantaire Nirav Modi and Kingfisher’s Vijay Mallya have brought to the fore the ugly truths about our PSBs and the huge systemic gaps which have led to a situation where India’s non-performing assets (NPAs) or bad loans are the fifth highest in the world. In 2016, the World Bank had flagged India’s NPA troubles, calling it worse than the situation during the 1997 Asian financial crisis. Currently, 21 PSBs control 77.3 per cent of the banking sector and account for more than 70 per cent of the total banking assets. The government has a majority stake in these banks. Nearly 45 per cent MOTN respondents said they have either never trusted public sector banks or have less faith in them now. Interestingly, 43 per cent also said they had more faith in PSBs now.
The rural pain
An overwhelming 76 per cent respondents say the condition of farmers has either deteriorated or has remained the same. The past four years have witnessed farmer agitations and falling crop prices in wholesale markets. While productivity has gone up, farm profitability has stayed abysmally low. Moreover, revisions in minimum support prices have not reflected on the ground, and rural infrastructure continues to be weak.
The roots of farm distress can be traced to the low price of food products, which in turn has led to low inflation and, in some cases, deflation or negative inflation. Retail and wholesale inflation for December 2018 has come in at 2.2 per cent and 3.8 per cent respectively. While retail inflation was at an 18-month low, wholesale inflation recorded its lowest figures in eight months. The worst fall in prices was in the food and beverages segment. Low food prices are a result of many factors, such as excess production and a dip in global prices leading to farmers getting less remuneration for their exports. Vegetables saw deflation in the past six months, while pulses have continued to be in a deflation phase for the past two years. How can this be addressed? “One way to improve remuneration for farmers without pushing up food prices is to reduce the profits of the middleman,” says D.K. Joshi, chief economist with Crisil. “Governments also need to develop market infrastructure where the farmers can directly engage with buyers.” As many as 65 per cent respondents consider low prices of food crops like onion at Rs 1 kg as the main reason for farmers’ distress (more so in the north and south regions).
There have been a slew of loan waivers announced by various state governments in the past 2-3 years, estimated at nearly Rs 180,000 crore. It’s an obvious measure to pacify farmers, as waivers rarely translate into any fundamental change on the ground. But from a perception perspective, the central/ state governments may have scored points, since an overwhelming 68 per cent respondents said loan waivers are a good step towards addressing farmers’ problems.
On ease of doing business, 44 per cent respondents believe it has indeed become easier to do business in India as against 41 per cent who replied in the negative. A slew of measures, such as single window clearance, easier compliance norms (GST included), were announced in the past four years, and it’s led to India climbing 23 points in the World Bank’s ease of doing business index to 77th place. It’s also the top ranked country in South Asia for the first time and among the top 25 nations in factors like getting electricity, credit and protecting minority investors. Meanwhile, there are no quick-fix solutions in sight for the major issues plaguing the economy. For the government, time is running out. Unfortunately, it has yet to accept that a problem exists, so remedies are still a way off.