It is no hidden fact that during Prime Minister Modi’s second term, India’s economy has not been doing well.
The Indian National Congress (INC) has been pointing fingers at the leadership strategy of Narendra Modi-led BJP government at the Centre simply for the utter lack of seriousness, attention and direction in its efforts to alleviate the economic crisis that the country has been facing. Needless to say the economy is at its worst and is barely meeting the ends. The crisis was exacerbated by the lockdown imposed to flatten the COVID-19 curve. It thus, won’t be wrong to say that the sudden lockdown shock has pushed the already struggling Indian economy from a slowdown to a full shutdown. Therefore, we can say that the economic crisis has already engulfed the entire region and still nobody is doing anything about it.
There is the common notion that the Central government has mislead the entire nation by unveiling a so-called 20 lakh crore package, which they said was 10 percent of the Gross Domestic Product. Well, the joke is on us because it essentially converts into less than 1 percent of GDP. The accusations on the Modi government of having driven the economy into a recession before the COVID-19 pandemic aren’t new. The centre is just being smart enough to cover up the losses caused by their strategies and schemes under the name of the pandemic.
In the economic relief package there was no immediate relief for the farmers of the country except when talking about the reforms. Interestingly, even the beneficiaries of these reforms are protesting against them. The poor farmers have already lost their fruit and vegetable produce due to the stringent lockdowns and were forced to sell crops below the minimum support price because they were not able to carry out harvesting processes. If the government was as sincere for the farmers as it claims to be, it would have simply invested money on harvesting. But, well, the government is happier to allow private traders into the APMCs in the name of new agriculture reforms.
In other words, India’s GDP growth has been slowing over the last six years and the harsh economic crisis was lying on our heads well before the Corona pandemic even took shape.
Recently published major economic indicators point to a major recession that resembles that of the early 1990s. The actual GDP, the lowest in the last five years, is rising at 4.5 percent. The production of manufactured goods is flat, while the production of capital goods is decreasing (again, the worst showing in the last five years).
Then there is the unemployment rate, which in October saw an all-time high of 8.50.
For a broad developing market economy, which had been rising at fast rates a few years earlier, these are dismal figures.
There’s one bright spot, however: the stock market, which is rallying to new highs. But, if the economy keeps faltering, it won’t last long. The businesses listed are part of the economy, and their shares will inevitably follow their pace.
What’s happening to the Indian economy?
Following the Global Financial Crisis of 2008, the country’s two main factors, exports and investment, have decelerated (GFC). That’s according to a recent working paper from the Centre for International Development at Harvard University titled “India’s Great Slowdown: What Happened? What’s the Way Out?”
The paper’s authors, Arvind Subramanian and Josh Felman, write, ‘Export growth slowed sharply as global trade stagnated, while spending fell victim to a homegrown balance sheet crisis, which came in two waves.’
As infrastructure ventures started during India’s investment boom in the mid-2000s, the first round, the Twin Balance Sheet crisis, covering banks and infrastructure firms, began to go sour.
Nevertheless, “facing temporary, negative demonetization and GST shocks, the economy proceeded to expand, powered first by income gains from the big drop in foreign oil prices, then by government spending and a credit boom led by a non-bank financial firm (NBFC). This credit boom funded the accumulation of excessive real estate inventory, inflating a bubble that eventually burst in 2019.”
What happens to an economy when a bubble explodes is well known. Subramanian and Felman claimed that demand has now sputtered, causing inflation to crash.
The National Democratic Alliance (NDA) government led by the Prime Minister Narendra Modi won the 2014 elections in the name of development, eradication of corruption and enforcement of the rule of law after the deteriorating economic situation and the discontent people have faced during the previous rule.
It was in November 2016 when the Government demonetised the large-valued currency notes of Rs.1000 and Rs. 500 to eradicate black money. These amounted for 86.4% of the total value of the Indian currency in circulation at that time, giving a macroeconomic shock to the entire economy. It also lead to devastating effects on the informal or unorganised sector which employs up to 90% of the actual workforce in the country. The informal sector is a crucial part of the Indian economy because it contributes nearly half of India’s domestic output. But the problem with it was that it mostly runs on cash transactions. And, thus, faced a tremendous shock due to demonetisation
Another economic shock was imposition of the Goods and Services tax or GST with the aim of replacing several indirect taxes in 2017. The second shock to the economy in less than a year, was criticised by several people for its poor design and implementation, especially when the economy was already struggling to revive from the demonetisation shock. The small and informal enterprises found it exteremely cumbersome in terms of procedures and finances to comply with GST’s numerous processes, thus marking a severe shortfall in the tax collection.
The GDP growth had been rising steadily from 5.5% in 2012-13 to 8.2% in 2016-1 after which it started to decline to 5% in 2019-20. And thus, we can say that the Indian economy has slowed down only after 2016-17, the year in which witnessed the aftershocks of the demonetisation and implementation of GST.
What has the government of Modi been doing to avoid the situation right now?
A variety of items, according to Udayan Roy, LIU Post Professor of Economics. Like a major corporate tax cut and the restoration of the outsourcing of public sector units. Meanwhile, by lowering its principal interest rate by 135 basis points, the Reserve Bank of India (RBI) has relaxed monetary policy.
That is one of the biggest cuts in the history of India.
But these steps have not been working, according to Roy, because of a “credit crunch”. He says that, the system of monetary transmission has broken down. Even though the RBI is trying to inject liquidity into the economy, there is no increase in credit (because a corporation does not want to borrow; because the prospects look bleak, there is no need for loans). There is stagnation of spending.
And that makes, according to his theory, the new situation strangely very familiar to the US since the global financial crisis.
Roy stated that, after the 2008-09 global financial crisis finished, Indian banks started to liberally offer loans to infrastructure-building businesses. These schemes were inadequate and the infrastructure businesses continued to struggle. They’ve been reluctant to repay their loans. So, banks are scaling back on loans. Investment and exports started to hurt this.
Simply put, under these circumstances, quantitative easing doesn’t work.
The Bottom Line
Conclusively, we can say that the current slowdown in India’s economic growth is no more hidden or concealed. People acknowledge it and they also know that it is not a mere cyclical decline. And unlike as the Government would like us to believe, the economy has been underperforming for years taking us back to the output levels in history.
People ignoring the warning signals of a decade-long decline in India’s economy buoyed by a fall in the saving and investment rates among others has never happened since Independence.