Alam Srinivas is a business journalist with nearly three decades behind him, working for The Times of India, India Today, Outlook, Financial Express and Business Today. He is the author of “Cricket Czars: Two Men who Changed the Gentleman’s Game”
Always read between the lines when the governments talk about the economic situation. Focus more what’s been left unsaid, rather than what is explained. This is also true about Finance Minister Nirmala Sitharaman’s recent speech in Parliament on the state of the Indian economy. In a confident mood, she later told the media that she, and Prime Minister Narendra Modi, were prepared to discuss the issues, but the opposition political parties, which walked out during her discourse, were unwilling to do so.
In her speech, the FM essentially made five broad points, which included:
l She, and the PM, were on top of the situation, and she had taken nearly three dozen decisions to tackle the problems in each sector and area
l India was going through a slowdown for sure, but not a recession
l Government expenditure was up, which indicated that public investment was on track to create jobs
l Tax collections too were up in the first seven months (April-October) of this fiscal year, which indicated consistent, but lower, growth
l Banking crisis, which was responsible for lower growth, was a thing of the past; bad loans do not imply loans that are written off
Sadly, each of these assurances came with several unsaid, and possibly misunderstood, riders. They were partly correct but short of overall facts and explanations. The FM merely cherry-picked the figures that proved her case and did not present an objective and true picture. She smartly chose issues that indicate growth. Most importantly, she was right on one point, and this is an important one because it wasn’t openly acknowledged till now. India is indeed going through a slowdown, and not a recession.
Almost three dozen, and counting Over the past few months, the FM announced several decisions, especially after the uproar within India Inc over tax coercion, and tax terror. Sops and benefits were doled out to several segments – foreigners, wealthy Indians, auto sector, small and medium firms, banks, and many more. But there were two distinct features about most decisions, and both don’t augur well for Sitharaman. In fact, they proved that neither she nor the PM was in control of the situation. The opposite seemed to be true.
The first is that most of the policies were reactive. When the situation in the auto sector seemed unbearable with months of negative growth, huge job losses, part-shutdowns of the factories, and large inventories, the FM swung into action. The government dealt with the mess in the non-banking finance companies (NBFCs) after the scandalous fall of IL&FS became public. Benefits were given to SMEs after they loudly, boldly and openly (through large newspaper advertisements) complained about their problems.
Second, most of the actions were in the form of Budget rollbacks. Several policies that the FM announced in her July Budget speech were retracted in a single day. Largely, they related to the higher taxes on rich Indians and foreigners. In fact, Sitharaman later went several steps forward when she reduced the corporate tax on large and small firms. And that too when government revenues were lower than Budget estimates! This proved that Budget 2019 was an ill-thought-of exercise, and didn’t consider the ground realities that were evident to most experts in July this year.
Slowdown versus recession
In economic parlance, a recession implies negative growth in two consecutive quarters. This hasn’t happened in India – not yet. But growth has slowed down considerably. India is still the fastest-growing economy in the world. But there isn’t any room for optimism. Things can go from bad to worse quite quickly in the near future. The reason: news and facts from several sectors, and many different indicators, show that the problems are acute. The precarious economic situation can easily lead to social tensions.
For example, there are some sectors that are clearly in a recession, or about to sink into it. The core sectors, which are crucial to any economy and include oil and gas, coal, steel, cement, electricity, and fertilizer, are down in the dumps. In October 2019 they contracted 5.8%, September 2019 saw a decline of 5.2%; the figure for August was a minimal growth of 0.1%. The same is true for the auto sector, and NBFCs. The regular banking sector, saddled as it is with looming bad loans (we will talk about this later), is also on a shaky plane.
Consumer demand has shrunk in several segments. The government, in its wisdom, has adopted the tax route to put more money in the hands of the companies. It may do the same with individuals in the near future. Lesser taxes may indeed mean more disposable incomes, but it cannot ensure higher spends. Companies that have tottered on low profits in the past, may shore up their profitability and reserves, rather than invest during a slowdown. The same can happen with people, who were tight-fisted for two years.
What is more crucial to note is that some sectors were decimated. These include the unorganised sector, largely due to demonetisation and GST (Goods and Services Tax), and the small firms in the organised segment. Even large companies have downsized. Hence, joblessness has zoomed; it is the highest in several decades. Unemployed youth can easily come on the streets to protest and resort to social violence. A part of the mob narrative, including lynching, can be explained because of this factor.
Where the money comes from, and where it goes
Sitharaman is at pains to explain that India’s growth trajectory is intact, even if it has wavered, because government revenues and expenditure have gone up consistently. This narrative hides more than it reveals for several reasons. One, no one believes that official data anymore. This was especially so after the huge discrepancies in government revenues between the figures in Budget 2019 and Economic Survey (2019). Experts pointed out that the differences revealed that revenues were possibly on the lower side.
Two, although revenues were up, they were lower than the official estimates. The most notable impact was on GST, where the difference was huge in 2018-19. This indicated that the slowdown was really a major issue, and had to be addressed soon. In addition, it showed that the overtly optimistic policymakers had turned a blind eye to realities in their budget plans. Their revenue targets were based on healthy growth. Only when they were inundated with criticism did they act, and that too in a piecemeal manner.
Three, some of the major sources of revenues have had a negative effect on public investment. A large chunk of the money came from the sale of government’s stakes in public sector units to other state-owned entities. Hence, Peter’s left pocket was picked to boost his right one. The money merely exchanged hands from one section of the government, PSUs, to another one, Exchequer. No new money was created in the bargain. In addition, the RBI’s coffers were used to finance the government.
These resulted in major investment disruptions. While the government was able to prove that its expenditure went up because of higher revenues, the ability of the state-owned entities to fund their own investments was severely curtailed. The cash-rich PSUs were unable to pursue their growth strategies and were forced to help the cash-strapped government, which made the mistake of high revenue estimates due to high growth. Overall, therefore, public investments either didn’t grow as much. In many cases, the government almost destroyed the PSUs. Consider the case of ONGC, which not too long ago, was cash-rich, and had the ability to invest huge sums in its oil and gas projects. However, the government first forced the company to buy oil assets in Russia at an inflated price for diplomatic reasons. Later, ONGC was forced to gobble up the loss-making Gujarat State Petroleum at a hugely exaggerated price for political reasons. The end result: ONGC is up to its neck in huge debts, and its cash reserves are almost empty.
Banks, the bad boys
Ever since the current economic crisis loomed up, about three years ago, the government consistently blamed it on the calamity in the banking sector. More importantly, it held the previous UPA regimes responsible for it. This served two purposes. One, it proved that the current regime was not involved and, in fact, took initiatives to solve the problems. Two, it allowed the past FMs and PM to take the moral high ground. In the process, as was logical, the economy tanked faster than it should have.
Let us examine these points. The boldest policy to tackle the bad loans was the 2016 insolvency code. It allowed the lenders to force any company, which defaulted on its loans, into insolvency. The company was then sold off within a prescribed time period. The buyer had to agree to pay the outstanding loans to the lenders. While this was a notable move, the problem lay with its inevitability. There was no room for manoeuvre, even for the honest companies, whose defaults were not “willful” or due to corruption.
Consider a scenario where the government did nothing to shore up the ailing economy and the fact that the worst impact, as discussed earlier, was on the core sectors. The bulk of the existing bad loans, and loans that were stressed but not bad, were in these segments – coal, energy, and steel. The slowdown forced more companies in these areas to declare insolvency, which put more pressure on the banks. Hence, while the banking crisis took shape during UPA, it was exacerbated during NDA-II. As more companies went through the loan crisis, production suffered, and slowdown intensified.
Since the NDA-II took a moral position on the economy, it did nothing to stem other disasters that too took roots during UPA. This was the visible and openly-discussed disaster in NBFCs. For months in advance, most knew that IL&FS was in grave trouble. The signs were boldly painted on the walls, as its credit rating slumped, and it was unable to repay small loans. But this government allowed it to go bust. The IL&FS emergency engulfed the entire NBFC segment, which negatively impacted consumer demand.
Normally, the NBFCs lend to retail consumers. The mix of a slowing economy and restricted finance to consumer acted like a double-edged sword. Companies stopped spending, and individuals had no access to cash. Corporate and retail investment slumped, and the government did not have enough money to make up for the difference. The economic predicament deepened, and still, the government took no measures to help things. Given the regular elections, politics had more priority than the economy.
For any economy to grow, a stable policy environment is a must. Investors, whether private or public, Indians or foreigners, should know what to expect, and what will happen. A 10-20 year vision is necessary. This was never the case with this government, which thrived and became more popular due to disruptions. Demonetization and GST are examples. The BJP’s politics and social endeavours are also about disruptions. So, there was no interest to guide the economy and soften the shocks.