What Ravi Shankar Prasad did not talk about

Outside the Eco-Chamber
Last Updated : 26 October 2019, 19:26 IST
Last Updated : 26 October 2019, 19:26 IST

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Earlier this month, Ravi Shankar Prasad, a senior minister in the Narendra Modi government, told the nation that all’s well with the Indian economy because people spent Rs 120 crore on October 2, watching movies (War, Joker and Sye Raa Narasimha Reddy). He later “withdrew” the statement (whatever that meant).

The problem is that in India, it is not difficult to come up with a big round number on almost anything. Allow me to explain.

India’s GDP for 2019-2020 is expected to be around Rs 211 lakh crore. Over the last few years, the private consumption expenditure has been at around 58-59% of the GDP. At 59%, the private consumption expenditure during the course of this financial year should be at around Rs 125 lakh crore.

This works out to an average private consumption expenditure of Rs 34,250 crore on any given day in the year. In comparison, how much money did Indians spend on October 2, watching movies? Rs 120 crore, or 0.35% of the money that Indians are likely to spend on any given day.

Also, one needs to take into account that October 2 was a holiday. It came at the end of one long weekend and was at the start of another long weekend. People normally tend to spend more on such days than on normal days. Once we take this factor into account, Rs 120 crore as a proportion of overall spending on October 2, would be even lower than 0.35%. So, Rs 120 crore sounds very big on its own. But it’s a puny amount in relation to what Indians spend in total daily.

The larger point here is that before using any big number, one should look at the overall context of where that number fits in.

One big number that Prasad did not talk about is the tax collection this year. This financial year, the government hopes to earn, and budgeted for, a gross tax revenue of Rs 24.6 lakh crore – 18.3% more than what it collected last year.

During April to August, the first five months of the financial year, the gross tax revenue collected stood at Rs 6.61 lakh crore, a jump of just 4.2% over the amount collected during the same period last year. There is thus a huge gap between the tax government hopes to collect this year and the amount it has actually collected.

This fall in tax revenue is another sure indicator of a slowdown in private consumption spending in particular and economic activity in general. With people going slow on spending, incomes have fallen, or are not growing, at the same pace as in the past. The profitability of businesses has suffered as well. All this has led to lower tax collection growth than expected. Only when incomes and profits grow at a faster pace, can any government expect to collect higher taxes than it had in the past. This can only happen when the economic activity is strong.

Of course, Prasad did not talk about this at all. It would have proved that there is an economic slowdown, something that the Modi government has tried to deny all along. While publicly the government is in a denial mode, a recent news report suggests that the government expects the gross tax revenue this financial year to fall by around Rs 2 lakh crore.

The question well worth asking is, is Indian growth becoming a victim of the development trap? As Ruchir Sharma writes in The Rise and Fall of Nations: “development traps” can knock countries off track at any income level. The challenges of creating productive industry—backed by better banks, schools and regulators, and fuelled by steady infusions of investment and credit—do not accumulate and confront an economy all at once. They hound an aspiring nation at every step up the development ladder.”

The country seems to be facing the factors referred to by Sharma, all at once. Our public sector banks are in a mess. Even though there is huge unemployment, when firms search for people to employ, they don’t get people with the right skills and that’s primarily because our education system, with rote learning at its heart, is in a bad shape. Some businesses don’t want to invest primarily because they are over-leveraged. Some others do not see a return on their investment. And above all this, consumer confidence, or the confidence an average Indian has in his economic future, has collapsed.

In this mayhem, the government is still singing, “All is Well”.

(Vivek Kaul lives to read crime fiction, and unlike his honest ancestors, makes a living writing on economics)

Published 26 October 2019, 18:38 IST

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