Shattering Illusions


When even the Chief Economic Advisor himself is worried, it's time for every- body else to stop pretending that all is well with the economy. False optimism has been the bane of pro-establishment pundits—they have been putting political loyalty above honesty and reality and painting a rosy picture of robust growth; rapid recovery and rising confidence.

Now drip by drip the harsh truth is emerging. A few days back data for industrial production was released—the Index is down to a 1.7 percent crawl. Retail inflation is down to a record low of 1.54 percent—which is not good news at all even though it might sound like that to the lay public.

Indeed Arvind Subramanian appeared more concerned about low consumer prices than about the shrinkage in factory output when he said: 'It is something that policy makers will have to reflect upon very, very, carefully. Such low inflation numbers indicate that underlying price pressures are weak. The latest IIP data confirms this".

Even the most loyal economists know that falling inflation is a sure sign of falling demand for goods and services. Coupled with sluggish growth, slump in investments and sagging enthunsiasm for new bank loans, it adds up to a worrisome scenario.

Even the apex chambers of commerce—who have till now been the loudest in making make-believe Shinning India prophecies are beginning to change their tune.

Reacting to depressing data, the FICCI chief coined a new word—"De-growth". Shedding the denial mode of the past six months, he said : "The subdued growth in manufacturing is worrying. Major sectors like capital goods, automobile and textiles have shown de-growth. The investment climate is disturbing".

Other chambers have echoed these somber sentiments. "The slow-down in consumer durables calls for cut in lending rates without further delay", said one, obviously reluctant to directly criticise the Modi government for the historic blunder of demonetisation and preferring instead to point a finger at the Reserve Bank for dragging its feet on bringing down the bank rate. The theoretical argument is that if interest rates are lowered, it could help in stimulating demand and reviving investments.

The ground reality suggests that merely tinkering with rates is unlikely to do the trick. India's 2.3 trillion dollar economy is struggling with several simultaneous speed-breakers and bottlenecks—hasty GST implementation, a festering bad loan crisis, a widening output gap, rising unemployment, stagnant investment and a virtual freeze in demand due to cash-starved consumers. The truth is that the economy has hit a very rough patch.

This is because of a factor that Ministers and government economists are refusing to look squarely in the eye—that the growth momentum was knocked out stride by the disastrous December 8 decision to slash out liquid cash from the entire economy.

Till this is acknowledged and addressed the anomaly of surging stock market speculation and reasonably buoyant rupee existing side by side with pessimistic real market conditions. Many observers are marvelling at the mystery—'There is so much surplus funds available in the banking system, but investments and lending isn't happening". That's because ordinary consumers have suddenly decided to cling on to whatever money they have, lest another Quixotic note-bandi or bank account rationing system is foisted upon them by a cavalier Prime Minister who has still not realised the damage to the national psyche he has done.

Even international commentators have come round to the opinion that demonetisation was the amazingly bold reform they initially thought it to be but a needless act of financial terrorism. As one global expert put it : "The pessimism in India stems from the fact that businessmen big and small in the domestic economy have still not recovered from last December's cash ban that interrupted employment for millions, forced farmers into fire sales of agricultural produce and hogged down the manufacturing sector".

The introduction of goods and services tax on July 1 only added to the confusion while a glut of bad loans means businesses are not borrowing to invest in Asia's third-largest economy.


Vol. 50, No.7, Aug 20 - 26, 2017