India at the Crossroads

Sushil Khanna & Mritiunjoy Mohanty

According to GOI estimates released on 30th November 2019, second quarter growth rates (July to September) for fiscal year 2019-20 had slipped to 4.5% in real terms. This was the lowest level recorded in six-and-a-half years, with the 6.1% nominal GDP growth (real growth plus inflation) coming in as the slowest in a decade. Growth had declined over six quarters in a row—following a robust 8.1% growth recorded between January and March of 2018. Fixed investment slumped to 1%, private consumption growth halved year on year, and manufacturing activity contracted by 1%.

Both the Reserve Bank of India and the GOI now expect GDP growth for the fiscal year 2019-20 to be at 5%. The RBI had predicted growth to be 7.4%. The State Bank of India, the country's largest bank, expects the final growth number to clock in at 4.6%."We now believe that the RBI projection of a 5.9-6.3 per cent GDP for FY21 could be on the higher side", the report said. "We could be now staring at a sub-6-per-cent growth for two successive years". ('SBI lowers GDP estimates for FY20 to 4.6% from 5% Business Today, web-edition, 9th January)

The slowdown is now so widespread that it is impossible to deny: from capital goods and infrastructure sectors, to consumer goods and automobiles almost all segments of commerce and industry face declining sales and massive layoffs. The slowdown in automobile sales is historically unprecedented as majors have had to cut back production in the face of inventory pileup with dealers some of whom have gone bankrupt.

According to market researcher Nielsen, the slowdown in FMCG sales is led by rural demand ('FMCG companies red-flag gathering rural slowdown', The Indian Express, 15.08.19). Unemployment is at an all-time high and about a hundred thousand workers have lost jobs in automobile industry alone while millions of jobs have been destroyed in housing and construction. Little wonder then that SBI research reports that both urban and rural wage growth has decelerated from growing at double digits in nominal terms to single digits ('FMCG companies red-flag gathering rural slowdown', The Indian Express, 15.08.19). The same report also says that rural wages are decelerating twice as fast as urban. . According to RBI's Annual Report 2017-18, capacity utilisation in the last several years has remained stubbornly and significantly below its long-term average.

According to the SBI, remittances by migrant labourers to selected states in the last one year showed that there is a decline in remittances in states like Assam, Bihar, Rajasthan, Odisha and UP.

Many understood that the informal sector was in pain, and it was not showing up in India's statistics, which are heavily based on the assumption that the formal and the informal sector move in tandem. There is a growing consensus that people didn't fully understand what was happening in the economy during demonetisation, because the older assumptions about links between formal and informal had broken.There is little doubt that Modi government's decision to demonetise the Indian currency in November 2016 structurally damaged the economy, deepening an already unprecedented investment saving slowdown.

Several studies and surveys of trades and industries adversely affected by demonetisation show that many of these firms have eroded their capacity to invest or are crippled with debt. The shutdown due to demonetisation, forced many small entrepreneurs to use their working capital to meet essential expenses, including consumption severely eroding their capital base (see for example 'Demonetisation: From Deprivation to Destitution' by Ritu Dewan and Radha Sehgal, Himalaya Publishing, Mumbai, 2018; 'Demonetisation Decimates Ranchi's economy' by Jean Dreze et al, thewire.in, 26 December 2016) . In effect demonetisation delivered a supply shock which affected supply capacities of informal small enterprises. And rebuilding supply capacities of small and informal enterprises that are seriously constrained in raising capital is neither easy nor quick.

As we noted in our article in Frontier 2018 Annual Number (Growth and Stagnation in the Indian Economy: Modi and the End of Economic Resurgence) "Demonetisation also crippled the real estate and construction sectors, bulk of which is unorganised with small contractors accounting for the significant part of construction activity. This explains the sharp decline in household savings and investment. If demonetisation disproportionately affected informal enterprises both urban and rural, it also affected the other big cash user, agriculture, as well. When we combine agriculture and rural non-farm enterprises, demonetisation disproportionately affected rural India. Little wonder then that rural wages are decelerating twice as fast as urban."

But the depth and breadth of economic crisis, particularly in the way it has affected the informal sector, did not reflect in the Annual Budget 2020-21 that the Finance Minister Nirmala Seetharaman presented on 1st February 2020. She genuflected towards international financial markets, foreign capital, domestic big business, the top 5% of India's population. For the rest there weren't even crumbs. There was hollow rhetoric of modernising farming and doubling farmer incomes. Same promises she had made last year. Her only solution to all problems was free markets and privatisation. She slashed expenditure today (particularly in rural areas) when demand is so weak with a promise to spend tomorrow on infrastructure. What was the logic of slashing income taxes when the government is in a deep fiscal hole because of sharply declining tax revenue growth? What was the logic of removing incentives to save when the savings ratio is declining and people are in the middle of unprecedented investment-saving ratio decline? What is point of raising import tariffs if people are not going to invest in domestic supply chains? In a world of global supply chains import tariffs are very blunt instruments. The only logic of the budget was to be able to say that the economy would grow between 6-6.5% and therefore avoid a ratings downgrade. But they might not succeed even in that. Both SBI and Moddy's have however forecast a sub-6% growth.

But the hugely successful national strike called by trades unions on 8th January against the economic policies of the Modi government and the sustained widespread countrywide protests against the NRIC, NPR and the CAA tells that there is substantial rejection of the Modi government's economic and social agenda. The anti-CAA protests have been led by women and urban youth. And an unintended consequence of the anti-CAA protests may be that finally the scales have fallen and the first cracks in the coalition that Narendra Modi and Amit Shah built to achieve Hindutva fascism are beginning to appear. India truly stands at the crossroads.

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Frontier
Vol. 52, No. 34, Feb 23 - 29, 2020