A Reality Check
The America-wizened Rahul Gandhi backed by the intellectuals and the Left who dominate media are on a high ev.er since the, report came out that India’s growth rate decelerated to 5.7 per cent in the June quarter of 2017-18, the lowest in three years because of the impact of GST implementation and the lingering effct of demonetisation which squeezed out 86 per cent of the currency in circulation. Both being Narendra Modi’s most vaunted schemes, Rahul and Co are ebullient their pet aversion is finally caught in a cesspool. The reports aver that demonetisation and GST have crashed the Indian economy. And that is what they are trying to make us believe. The various data and reports in Economic papers and periodicals have been flaunted.
The growth rate deceleration to 5.7 per cent in the June quarter of 2017-18, has in effect become a salvo for the Modi-detractors to hurl at him. Rahul even told his scholarly audience in Berkley, the damaging impact of GST and Demonetisation, investors have disappeared, investments in even infrastructure has dried up, small and medium industries are starved of funds, the number of the jobless has been continuously rising.
The anti-Modi elements, all brilliant schemers, gauged that the situation was ripe to stir up negativity and instil pessimism against the ability of the Modi Government to salvage the economy from the impact of GST and Demonetisation, which was ridiculed as a ‘self-inflicted’ wound’ and GST was ‘hastily applied.’
Rahul Gandhi said, ‘Demonetisation and the hastily implemented GST has caused tremendous pressure on the economy.” He said that it cost the country a two per cent loss in the gross domestic product (GDP).
“Decisions like demonetisation which removed 86 per cent of cash from circulation were done unilaterally, without asking the Chief Economic Advisor or the Cabinet or even Parliament, it (demonetisation) caused tremendous damage,” he added. He accused Modi of taking “reckless and dangerous” decisions like demonetisation and “hastily-applied” GST.
Pointing out the stark contrast between the demand and supply of jobs in India, Gandhi said 33,000 youngsters join the job market every day; however, only 500 jobs are created daily. “The decline in economic growth today is worrying and its leading to an upsurge of anger in the country.”
Gandhi warned that if the current economic and employment scenario continues, it would be detrimental to India as well as the world.
“If we continue at the current rate, if India cannot give the millions of people entering the job market employment, anger will increase and it has the potential to derail what is being built so far,” he said. “That will be catastrophic for India and the world beyond.”
Rahul’s warning at international level showed his desperation to keep the charge against Modi of slowing down of economy, alive. He does not possibly believe assertions by Modi, RBI Governor, Financial Institutions and several others that the upturn is already discernible and that growth rate will be back to healthy growth rate of about 7 per cent. Rahul has apparently very poor opinion of Modi’s ability for economic management.
Modi’s detractors would have us believe that he cannot regain initiative in arresting the downswing. Former BJP ministers, Yashwant Singh and Arun Shourie who have been vicious critics of Modi also predicted a very bleak future under their pet aversion.
Such aggressive and well-coordinated concerted effort to convince people that Modi has damaged the country’s political, economic infra-structure and destroying the social fibre, shows that the sudden concern for the economic health of the country is more politically-oriented. Modi could not be defeated through polls, an alternate means to wrest power from him was needed. The difficulties people, industry, traders, farmers, all had to endure due to demonetisation and then during GST implementation, the opposition feels could produce a positive result for them in 2019. The signs of recovery, efforts being made for arresting the downward slide, however, indicate that the opposition could be in for disappointment.
The RBI governor Urjit Patel while admitting that the Indian economy’s growth in the June quarter touched a three-year low of 5.7 per cent on account of the lingering effect of demonetisation and run-up to GST implementation, said ‘there are visible signs of upturn and economic growth is likely to exceed 7 per cent in the last two quarters of the year as projected in last week’s monetary policy report.’
“We have started seeing the upturn. The Nikkei India Services PMI Business Activity Index rose more than 3 percentage points in September over August; the core sector IIP (index of industrial production) saw a 4.9% rise in August. If you look at some of the high-frequency data such as automobile and two-wheeler sales, you also see the upturn there,” Patel said. ‘We should aim at achieving the inflation target without losing sight of supporting economic growth.
His prediction refutes Yashwant Sinha’s pessimism about the economy recovering by the time 2019 elections are held. He, in an article headlined “I need to speak up now”, described the economy as a “mess” that will not resuscitate before the next general election in 2019. Sinha had said the purpose behind highlighting the concerns about the economy through an article was to bring certain issues in public domain so that the government does a course correction.
The World Bank President Jim Yong Kim too sounded very positive about the sluggishness in the economic growth. What he said should make Rahul think of some alternative issue to fight crucial state elections slated for the end of the year and begining of 2018.
GST: needs monitoring for fully realising ‘ease of doing business’
A historic path-breaking tax reform Goods and Services tax (GST), was adopted by Parliament at midnight of June 30. It was generally welcomed by all concerned. The believe was that it was a genuinely uncomplicated tax and would ease doing of business. But now after 100 days it is one of the Narendra Modi acts that is being blamed for slowing down economy growth, a downward spiral from which according to Yashwant Sinha it cannot come out by 2019.
While his charge is debatable and in fact has been challenged both by Modi and Finance Minister Arun Jaitley, its obvious from the amendments done recently that the main purpose of easing of doing business, an important objective of GST, was not being fully met when the implementation began. Instead of easing of doing business, the complicated way of preparing accounts against which refunds were to be made, blocked funds and medium businesses suffered. It affected the businessmen’s zeal for starting new ventures.
New investment projects announced in the July-September were the lowest for any quarter in 13 years. Irony is that Industry has been largely supportive of GST except the textile sector. “From a consumer’s standpoint, there were no shortages in supplies and increases in prices, barring few cases where the effective rate of tax has gone up significantly.” Said The Economic Times.
“There have been reports of transportation of products becoming easier and efficient, which means that accessibility for consumers has improved. Deferment of e-way bills till April 2018 at the GST Council’s 22nd meeting is a welcome step.”
The problem rather serious one, developed at the implementation stage when Small and medium enterprises (SMEs) started facing acute shortage of funds as while they struggled with the complex of GST laws and compliances, their refunds were delayed. The Economic Times rightly said, “of the legislative provisions, such as application of reverse charge on purchasers in case of purchase from unregistered vendors and invoice matching for availability of input credit, meant that large customers were reluctant to deal with unregistered and smaller vendors.
The GST Council recently deferred the applicability of reverse charge mechanism on purchases from unregistered suppliers, which is another step in the right direction.
It recommends that “rather than deferring, such provisions should be withdrawn. The export industry also felt the pinch of GST, with quantum of export incentives getting reduced in certain cases and lack of clarity in terms of procedure/ timelines for getting refunds of input taxes. A major relief has been provided to the exporters by extension of upfront GST exemptions on their purchases till March 2018.”
Some of the problems faced by SMEs have been resolved by the decisions taken at the GST Council recently. For instance the businesses with a turn-over of less than Rs 1.5 crore have now been permitted to file quarterly reports instead of every month. The exporters have been assured that all held up refunds of integrated GST paid on exported goods will be expeditiously cleared—over July-August over Rs67000 crore had accumulated.
The GST Council announced many other reliefs which will surely stimulate exports.
“The biggest bone of contention has been the technological challenges and readiness of GSTN to process large volume of data and transactions. This kind of IT infrastructure is sunprecedented across the globe and definitely required a bit more time for test runs before implementation, “ was a perceptive observation by ET.
Recognising this, the GST Council came up with summary return filings for the first few months and deferred the filing of detailed GST returns.
The success of GST is dependent on a strong technological backbone and the GST Council may need to be more flexible to respond to these challenges, as we go along.’
Arun Jaitley faced in the US a volley of searching questions on demonetisation and GST, which are being blamed for depressing economic scenario, drying up of investments, consequently shrinking of job opportunities, swelling the already huge number of the unemployed. The youth who has become aspirational, will be first to desert Modi if such situation persists.
Jaitley stoutly refuted the critics. He said that both GST and demonetisation are having desired impact, they have led to increasing tax compliance and squeezing quantum of cash in the economy. ‘I do hope that India is able to retain its growth rate once again.’ said Jaitley
The full realisation of GST will only be possible if technical support is of high standards and the Babus don’t persist with their red-tapism wrapped policies. What is the purpose of varying tax rates and touching 28 per cent, which affected restaurant and hotel industry badly.
If GST is properly and sensibly implemented, its impact will justify the elation with which its advent was welcomed in Parliament on the midnight of June, 30.
World Bank President on being asked about the slowing down of economic growth rate did not sound alarmed. “We think that the recent slowdown is an aberration which will correct in the coming months, and the GDP growth will stabilise during the year. We’ve been watching carefully, as Prime Minister (Narendra) Modi has really worked on improving the business environment, and so, we think all of those efforts will pay off as well,” Kim said.
On disruptions in preparation for the GST, the World Bank pointed out that it will get corrected in the coming months.
World Bank President Jim Yong Kim also said that the Goods and Services Tax (GST) is going to have a hugely positive impact on the Indian economy. “There’s been a deceleration in the first quarter, but we think that’s mostly due to temporary disruptions in preparation for the GST, which by the way is going to have a hugely positive impact on the Indian economy.’
Rahul’s and the doomsday predictions orchestrated by the media have lost sting in the wake of statements by Patel and Kim whose credibility nor their eminence as economists can be questioned.
The GST–which along with demonetisation are the two most ambitious schemes of Modi— will have hugely beneficial impact on the Indian economy has been declaed by the World Bank President, and significantly no one, neither Rahul nor Yashwant Sinha have countered him. Neither the usual suspects in the media have contested Kim’s assertion.
Does it leave only demonetisation for the Liberals to accuse Modi of ruining the economy? Not exactly! There is no disputing that due to demonetisation, investments shrank, people faced hardship but it did help to bring money out which was not in circulation and brought lakhs into the Income-Tax net. Payment of tax by additional numbers, most being wealthy, will help GDP. Richard H. Thayler, now a Nobel Laureate, had tweeted immediately after the big denomination notes were banned that ‘This is a policy I have long supported. First step toward cashless and good start on reducing corruption.’
It is ironic that although Thayer mentioned that demonetisation curbs corruption, both Modi and Jaitley have continued to stress that it will help ferret out black money. Ignoring the corruption angle has caused difficulties. Lord Meghnad Desai in his column in the Indian Express has pointed out that as corruption for Modi is not just illegal activity but treasonable. Its removal is religion for him. This is why he worries about its eradication more than economy. Desai has rightly pointed out that under the socialist policies of Nehru, bribery was prevalent—give the power to any officer to issue a permit or licence, he will be easily corrupted. During Indira Gandhi’s nationalisation spree, more opportunities for bribery opened up. ‘The so-called neo-liberal reforms did not dismantle the socialist structures.’ Corruption, bribery and nepotism continued.
In an economy used to corrupt practices, it is invariably difficult and costly to remove corruption. AS Desai said for small and medium enterprises GST was shocking. Tax evasion which added to profit became impossible under GST.
The GST and demonetisation are not the real issues for Modi, he knows that sooner than later the positive impact of these two on the economy will be obvious to all, meanwhile Rahul and Co can continue to use them to browbeat Modi. But they will soon be silenced by the likes of Patel. Kim and the ground reality.
The real issue for Modi is that, says Desai, ‘that the entire economic system built over 70 years of socialism is designed to encourage tax evasion and corruption.’
To remove corruption, the socialist structure has to be dismantled. Will Modi, or can he, do it. So far he does not seem to have any intention to go in for deregulation or de-nationalisation.
‘He has to think new ways to enhance growth’ for he has to remove corruption, he has over-hauled the system through GST and demonetisation. And that slowed down the growth.
This is Modi’s dilemma and challenge. But he has the wherewithal to take on any task if he makes up his mind.
The primary mistake his critics make is to ignore the fact that Modi is a pragmatic politician who can gauge the people’s pulse.
This was evident from the ease with which Modi countered economic slowdown critics. He reminded that the growth rate hasn’t fallen to 5.7 per cent for first time. And iterating his praise for demonetisation, the Prime Minister said the cash to GDP has come down to 9 per cent after demonetisation and that it was 12 per cent before November 9, 2016.
He acknowledged that the country’s growth rate had come down in April-June quarter but insisted that his government is committed to reverse the slide. “After achieving average growth of 7.5 per cent over 3 years, we accept that growth rates came down in April-June but government is committed to reverse it.”
“Dip in economic growth in one quarter has boosted pessimists; not first time growth has dipped to 5.7 per cent in any quarter,” he said.
It dipped to 5.7 per cent or below eight times during UPA regime when nation was faced with high inflation, CAD and fiscal deficit.
He pointed out that double digit inflation has come down to less than three per cent with current account deficit and fiscal deficit being brought down to 2.5 per cent and 3.5 per cent, respectively.
Modi asserted that fundamentals of Indian economy remain strong and that the reform process will continue keeping financial stability in mind. “Decisions of the government will take the country to the next league.”
And vowed to not let the present difficulties jeopardize the future of the country.
By Vijay Dutt