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The reality that is catching up with PM Modi

By Mohan Guruswamy

The tale of King Canute holds a salutary lesson to our Prime Minister. Canute set his throne by the seashore and commanded the incoming tide to halt and not wet his feet and robes. Yet continuing to rise as usual, the tide dashed over his feet and legs without respect to his royal person. Then the king leapt backwards, saying: “Let all men know how empty and worthless is the power of kings, for there is none worthy of the name, but He whom heaven, earth, and sea obey by eternal laws.” Like the seas, economies too cannot be ordered about. Any stopping of the rising waters requires long-term and carefully constructed plans for dikes, sea walls and water concourses. This requires a timeframe that our leaders do not have the luxury of enjoying. So they create illusions they can sell to the voting citizen consumer. Our Modiji is the master of illusion.
The post-facto boost of 2.2 per cent given GDP enabled the Narendra Modi government to claim to have restored growth to close to seven per cent after the dismal 4.7 per cent in the last year of the UPA. But even this didn’t help in sustaining the illusion of rapid growth that the Modi government was trying to create. The problem was that even this was not working, and the nominal GDP — the GDP before adjusting for inflation — was falling. It fell to 5.2 per cent, but the Modi government got a windfall in the form of a deflation of about 2.2 per cent. So the real GDP became 7.4 per cent with the 2.2 per cent boost it gave itself earlier that year. This enabled it to stake the claim of being the “fastest growing major economy in the world”. It was just statistical legerdemain.
In the real world, nominal growth matters much more than the inflation-adjusted real growth. To a firm’s revenue, whether from realisations from current sales or projections for the future, cash flows and investments, real growth hardly matters. Nominal growth matters for the government too because tax revenues are also affected by deflation. The sharp decline in direct tax collections gave this away, but Mr Modi and finance minister Arun Jaitley are not ones to be bothered with such niceties and accuracies. To them, it is all about creating a spin and sustaining it. This is a habit that persists. Fudging data and then misinterpreting them is now a part of their nature.
To compound matters, falling revenues also began to impact job creation and the mood of gloom and doom began to infect the public mind again. So in November 2016 Mr Modi reached into his bag of tricks and pulled out another bunny. He went in for a ban of Rs 500 and Rs 1,000 currency notes.
This was not a demonetisation as is commonly understood by economists. It was a straightforward, albeit a somewhat draconian, note exchange scheme, but Mr Modi is nothing without the drama. He termed it a demonetisation. Demonetisation is described as “the act of stripping a currency unit of its status as legal tender”. It occurs whenever there is a change of national currency: “The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins”. The condition that usually forces demonetisation is hyperinflation. And here we were experiencing deflation. But Mr Modi does not burden himself with concern for terminological accuracy. It was hailed by the government’s drumbeaters as a stroke of Mr Modi’s genius that will result in a bonanza of Rs 3-4 lakh crores to the Reserve Bank of India. But by taking out that much money from the market, Mr Modi inflicted a huge pain on an economy where 98 per cent of all transactions accounting for 68 per cent of the value are in cash. At any given time about 150 million workers in the informal sector are daily wage earners and are still paid in cash. With the abrupt sucking out of 86 per cent of the cash, it was this cohort who bore the brunt of the assault. The vacuuming of the cash led to huge job losses and tens of millions just went back to their villages. The economic costs have been estimated to be at least Rs 225,000 crores, or 1.5 per cent of GDP that year. It cost another Rs 40,000 crores to print new notes, some even in China, we now hear, recalibrate ATMs and counting machines, and transport the cash, while people stood patiently in lines to get some of their own money back from the banks. Over a hundred died in the waiting.
The other big bang reform undertaken by Mr Modi and announced in a dramatic midnight speech in Parliament was the Goods and Services Tax (GST), a tax regime which he was singularly opposed to as the CM of Gujarat and which he thwarted. There can be not much argument in favour of the old regime, which leaked like a sieve and gave plenty of scope for corruption. But in the hurry to get the demonetisation albatross off his back, Mr Modi hurried through with this. The lack of preparation shows. Instead of a two-tiered system, we have a cumbersome five-tiered system. Since its launch it has been amended about 200 times. Instead of simplicity, the new GST regime spread chaos. One thing is commonly accepted, that is small businesses across the country, that together employ 110 million people and contribute a third of the national economy, are hurting. According to estimates by the well-regarded Centre for Monitoring the Indian Economy, Mumbai, nearly five million workers lost their jobs over the past year. India’s unemployment rate rose to 6.4 per cent in August from 4.1 per cent in July last year despite an additional 17 million people joining the workforce.
But the Prime Minister blithely keeps repeating that his Mudra programme has created employment for as many as seven million people in 2018. Mr Modi says: “This data of seven million jobs is not like building castles in the air. It has been calculated by an independent agency on the basis of the Employees Provident Fund Organisation figures.”
Now consider this. The government gave no budget for directly financing the PMMY loans to businesses. It also gave no budget to Mudra for refinancing loans to other financial institutions. Mudra has a corpus of Rs 10,000 crores allocated by the RBI from priority sector lending shortfall. Till March 31, 2017, Mudra drew Rs 8,125 crores from that corpus, sanctioned Rs 7,492 crores (2015-17), and had an outstanding refinance portfolio of Rs 6,113.87 crores. However, total loans counted as Mudra stands at Rs 3.17 lakh crores. This erroneously gives an impression that Rs 3.17 lakh crores in new financing has been made available by the government. The problem for Mr Modi is how the government should go about improving its investment to GDP ratio, which in turn depends on the savings to GDP ratio? The record here is truly depressing. India has reached a high of close to 41 per cent in 2007. Since then it has been falling year after year and is now at 30.2 per cent. The investment to GDP ratio (a measure of what part of the overall economy does investment form) peaked in 2007 at 35.6 per cent. It has been falling ever since and in 2017, it had stood at 26.4 per cent. No other country in the world has gone through such a huge investment bust, during the same period. A fall in the investment to GDP ratio also suggests that enough jobs and employment opportunities are not being created. A recent estimate made by the Centre for Monitoring the Indian Economy suggests that in 2017, two million jobs were created for the 11.5 million Indians who joined the labour force during the year. This is the reality thatMr Modi needs to come back to.