What is Modi govt hiding about India’s economy?
India is in a silent, unreported crisis, a crisis of payments. There is no money to honour upcoming commitments. Later this week, for instance, Non-Banking Finance Companies (NBFCs) — a financing mechanism unique to India — have about Rs600 billion (approx $8.3 billion) of bonds due for redemption. They have no money; their back was broken by the demonetisation of high-denomination currency back on November 8, 2016. They are what the medium, small and micro enterprises (MSME) sector relies on for financing, particularly in areas like housing and transport. With public sector banks saddled with Rs10 trillion of bad loans (or non-performing assets, NPAs), there is little money available for launching or expanding business.
So Indian GDP growth is stuck at around seven per cent. This might be a lot in other countries — indeed, India’s quarterly GDP numbers have beaten other large economies lately — but for India it is not enough for providing employment and eradicating poverty. A million Indians join the workforce every month. This requires double-digit growth. The last time India achieved double-digit growth was during the Manmohan Singh years — according to the figures revised, ironically, by Prime Minister Narendra Modi’s government (to make his own economic management look good).
This has panicked the government, which is as usual in election mode. It has caused a confrontation with the Reserve Bank of India (RBI)’s two top officials, both of whom are Modi appointees. The government wants the RBI to hand over more money. This is usually a prescription for inflation, which no government wants in an election year — so the fact that it is willing to risk inflation is an indication of a deep hole it is in.
RBI Governor Urjit Patel has been under pressure to release Rs3.6 trillion, which the government would use to help out the NBFCs as well as finance its election year sops for voters. The RBI wanted that money to recapitalise the banks and clean their balance sheets so that they could begin lending again to businesses and thus drive growth. Hence the RBI has resisted the government, and last month Deputy Governor Viral Acharya even spoke (in a public lecture) about the need for the RBI to maintain its autonomy. The government has threatened to unprecedentedly invoke Section 7 of the RBI Act to direct the RBI to give the money. It is speculated that Patel may resign at the RBI’s board meeting on November 19.
Incidentally, this Rs3.6 trillion is the same amount that Modi had expected to reap from demonetisation. When this whimsy was announced on November 8, 2016, Modi had said it was intended to curb black money, corruption and counterfeiting. (It is a separate matter that later justifications for demonetisation included digitisation of the economy, and widening the tax net and collections. To say that demonetisation increased digitisation is as silly as saying facebook usage increased because of demonetisation. Tax payers and payments have increased at more or less the same rate as before demonetisation.)
The government figured that there was about Rs3 to 4 trillion of black money in total cash in circulation of nearly Rs19 trillion. It was recently reported that four hours before demonetisation, the RBI gave the government a written note that the move would be ineffective against black money since within India such wealth was held in real estate and gold. The RBI added counterfeiting which was only about Rs4 billion, a drop in the bucket out of proportion to the planned move. The government thought the black money would not be returned to banks, which would translate into a surplus on the RBI’s books, and that could have been transferred to the government. Instead, according to the RBI’s annual report this September, 99.3 per cent of the money was returned (the rest is presumably with banks in neighbouring countries). The expected financial windfall never arrived.
This Rs3.6 trillion of black money is one of the many voodoo figures fed to the government by chartered accountant S Gurumurthy, who is
Whatever happens at the RBI, there are debts to be paid, and banks and NBFCs to be recapitalised. The payments crisis is not going to be sorted out in a hurry.
believed to have urged Modi to undertake demonetisation. He also persuaded Modi that bringing back the black money stashed abroad would pay Rs15 lakh into each Indian’s bank account. Despite no money in our bank accounts after five years, and despite demonetisations’ failure (even Modi did not utter a word on its second anniversary last week). Gurumurthy is now on the RBI board as a non-executive director. He has been bullying Patel to release the money to help the demonetisation-damaged MSME sector (a core voting block of the BJP) that Patel and Acharya have resisted.
Whatever happens at the RBI, there are debts to be paid, and banks and NBFCs to be recapitalised. The payments crisis is not going to be sorted out in a hurry. As former RBI Governor Raghuram Rajan claimed last week, when the world picked up in 2017 India went down due to demonetisation. India missed out on double-digit growth, and this is why demonetisation is likely to be Modi’s legacy.