Economy and growth: One year of stagnation

As the NDA government headed by Narendra Modi completes one year in office, there are no signs of revival of growth. Shopkeepers and property dealers are lamenting the absence of customers. Prices are about 20 per cent down since last year. This despite control of corruption at high places, a reduced price of imported oil, and e-auction of coal blocks and spectrum having begot the government huge revenues. What has gone wrong?

It is in the nature of a child to put on weight. A child becomes stunted only if the food earmarked for him is given away to another. The economy is no different. Growth is held up only when there is leakage from the economy. Previously, leakage was taking place through political corruption. Money that should have gone into the coffers of the government was siphoned away to tax havens in foreign countries or to buy shares in the New York Stock Exchange. Another part of the money was invested in real estate. That led to some growth but only for the corrupt and the rich.

Corruption at high places has certainly been curbed under the Modi government. The previous UPA dispensation had decided to pay a rate of Rs 14 per British Thermal Unit to Reliance Industries for gas from KG Basin. Modi reduced this to Rs 5. E-auction was introduced for coal blocks and spectrum leading to huge revenue gains for the government. These monies have now become available to meet government expenditures. The government could have used it for making highways. That should have led to higher growth rate. That has not happened. Why?

The answer seems to lie in the nature of government expenditures. Increased income of the family can be used for buying liquor or a luxury car. In this case, health of the children will continue to suffer. Or, the income can be used to buy organic food and to buy sports equipment for the young ones. That would lead to growth. The impact on health of the children will depend upon how the money is used. Investment in infrastructure is suffering. Bleeding of the economy by corrupt politicians has been replaced by bleeding of the economy by a bloated bureaucracy.

Former RBI governor C Rangarajan writes that capital expenditures of the government in 2015-16 remained unchanged from the previous year at 1.7 per cent of the GDP. Bulk of the pubic investment, he says, is coming from the public sector institutions such as Coal India and the Indian Railways. This means that the money garnered by the government from e-auction of spectrum and coal blocks has not translated into increased investment. Modi is like the head of the family whose earnings have increased but expenditures on organic foods for the children remains unchanged. No wonder, growth is stagnant.

Private investment

Modi is trying to jumpstart private investment without bothering to create demand. Bankers are unwilling to lend because they do not see demand in the market. The way out is to put more money in the hands of the aam aadmi. Businessmen will be running over each other to make investments if there is demand.

Bankers too will be happy to lend. Employment in the manufacturing sector is shrinking. Wages of the unorganised workers have been stagnant lately. Modi may indeed build a bullet train from Delhi to Mumbai but he is clueless about ways to increase incomes of the poor. In fact, his “Make in India” riding on the back of large companies will lead to a huge loss of jobs as these companies bring automatic machines to replace workers.

We do not know how the government is actually spending the money. Part of the money will go to provide increased salaries and perks to government servants. Such expenditures will not add to growth. Previously, the politicians were investing their ill-begotten wealth in real estate; now the bureaucrats will do the same. Growth will come only if the money is spent for building infrastructure. Only time will tell if Modi makes this happen. As stated by Rangarajan, the signals are not very favourable at the moment.

The international economy has not helped. We have gained much from low prices of oil but lost equally due to weak exports. Christine Lagarde, Managing Director of the International Monetary Fund, has repeatedly warned that advanced economies are facing high debt, high unemployment, and low growth and low inflation. That source of growth, therefore, will remain elusive in the immediate future.

The PM must embark on fiscal expansion for funding infrastructure projects. Let there be some increase in inflation but let roads be built. He should disband those welfare schemes in education and health that are providing benefits to the government servants rather than the people. He should transfer this money directly to the households. That will insulate the poor from inflation and also generate demand and push up growth.

Quote Hanger

Earlier, you felt ashamed of being born Indian. Now you feel proud to represent the country. Indians abroad had all hoped for a change in government last year.
Narendra Modi

The word “corruption” is being removed from India’s political dictionary.  The environment of “prosecute the investors” has been completely reversed. The “scam and scandal, corruption and retribution” Raj is behind us.
Arun Jaitley

Modi has been visiting foreign
countries. Did he visit the home of any farmer? Where are the achhe din...If you ask the farmers, labourers, tribals then they will give Modi government zero out of 10. But it will get 10 out of 10 from
select industrialists.
Rahul Gandhi

Initiatives and challenges

Government Programmes

Make in India – to make India a global manufacturing hub
Digital India and Skill India – to speed up development programmes
PM’s Jan Dhan Yojana – provide bank accounts to 15 crore people
Pradhan Mantri Jeevan Jyoti Bima Yojana – Insurance cover with a
premium of Rs 330 per year
Pradhan Mantri Suraksha Bima
Yojana – Insurance cover with a
premium of Rs 12 per year

Politically Speaking..

Victories in Haryana, Jharkhand, Jammu and Kashmir and Maharashtra
Decimation in Delhi polls

Tough fight ahead in Bihar polls later this year; Tamil Nadu, West Bengal, Assam, Kerala next year

Ghar Wapsi -- Sangh Parivar outfit's programme to re-convert people to Hinduism hit the wrong chord

Attack on churches -- Though police said it was not communal, a series of incidents dented govt’s image

Provocative statements -- Remarks by Union Ministers Niranjan Jyoti and Giriraj Singh and Sakshi Maharaj and his ilk 

Murmurs against the power troika of PM Modi, BJP chief Amit Shah and Finance Minister Arun Jaitley

Bills: Success in Lok Sabha but road block in Rajya Sabha

Government’s initiatives


Land Boundary Act
Labour reforms making it easy for industry
Plans to curtail powers of trade unions
Controversial amendments in Land Acquisition Act pending in Parliament
Controversial amendments in Juvenile Justice Act bringing 16-18 children under the ambit of adult law pending in Parliament

FINANCE

Positives

FDI up 56 per cent since the launch of Make in
India initiative in Sep 2014
Govt brings in law to curb foreign black money, also moves ahead on benami transaction laws to curb  domestic black money.
Able to get Goods and Services Tax passed by LS after nine years’ delay
Deregulation of diesel prices

Negatives

Inflation moves into negative territory but common man not benefited
Rupee dips from Rs 60.97 (Mar ‘14) to Rs 63.52 (May ‘15)
Industrial production hits a five-month low of 2.1 per cent in March.

EDUCATION

Positives

Initiates consultation on National Education Policy amid allegation that minister is pursuing saffron agenda
Introduced scholarship schemes to encourage girls to pursue technical education

Negatives

Forcing Delhi University to rollback four-year under graduate programme
Appointments in ICHR with right leanings
IIT Delhi Director RK Sheogaonkar resigned over differences with Minister

TELECOM

Positives

Allocation of spectrum and coal in a transparent way through auction.
Bids worth Rs 1.09 lakh crore for spectrum
Roaming charges come down by 75 per cent
Allotment of coal to state power firms without any hitch
Bids worth over Rs 2 lakh crore over period of 30 years for coal mines

Negatives

Mobile Number Portability (MNP) delayed

DEFENCE

Positives

Clearing 49 per cent FDI  n Pending
procurement decisions cleared
Buying two squadrons of Rafale fighterjets

Negatives

DRDO chief removed unceremoniously

FOREIGN AFFAIRS

Positives

PM visits 18 countries n Agreements and deals on various issues with China, France, Germany and BRICS countries

Negatives
Stalemate persists on India-China boundary issue n Flip-flop on Indo-Pak talks

(The writer was Professor of Economics, IIM-Bangalore)