The biggest challenge for finance minister Arun Jaitley in formulating the 2017-18 budget is navigating the “data darkness” which has slowly enveloped the Indian economy over the last six months.
Former chief economic advisor Shankar Acharya, who spent over a decade advising finance ministers in the governments led by Narasimha Rao as well as A.B. Vajpayee, told me it would be a near impossible task to accurately assess the GDP base upon which all other figures for 2017-18 will be predicated.
If the finance minister overestimates the GDP base, as is evident from his official statements denying the negative impact of demonetisation, he may end up hugely underestimating the expenditure and, as a consequence, the borrowing requirements of the government. The damage to the economy, as a result of demonetisation, in the second half of 2016-17 is still in the realm of speculation with the GDP predicted to decline by 1 to 3 percentage points during the October-March period. GDP grew in the first half of 2016-17 by 7.2%.
The IMF has tentatively estimated an overall decline of one percentage point for the entire financial year. This means the GDP growth for 2016-17, as per IMF, could possibly be 6.5 %. As per the older GDP series this would be less than 5% growth! Mind you, even this would appear very conservative given the widespread damage suffered by the broader economy.
The RBI has just concluded a business sentiment survey for the January-March quarter which shows a further deterioration in the demand conditions. The survey elicited views from 1221 manufacturing companies which reinforced worsening demand. This contradicts the government claims that consumption demand would quickly recover as re-monetisation progresses.
Going by the RBI survey, a quick improvement in demand conditions does not seem to be happening. This is also reflected in the quarterly results (October-December) of 160 companies from across different sectors which shows the slowest profit growth in nearly 3 years. This does not augur well for future employment even in the organised sector.
Just one example may serve as an indicator of what lies ahead in regard to employment in the organised sector. HDFC bank, a market leader in profitability and growth continuously for two decades, showed the slowest profit growth in 18 years during Oct-Dec quarter and is in the process of shedding 5% of its employees post demonetisation. Closer home, the media sector is replete with examples of the bigger companies shedding employment on a significant scale. Mind you this is only the organised sector which accounts for less than 5% of the total employed population of 470 million. You can well imagine what must be happening in the more vulnerable, unorganised sector which employs 95% of the work force.
Unorganised sectors such as agriculture and construction which together employ close to 300 million are probably facing the worst consequence of demonetisation. Prime Minister Narendra Modi and his ministers are simply avoiding talking about the potentially massive job losses in the unorganised sectors. They are in a state of deep denial even as Modi attempts to play up the larger “moral purpose” behind cleansing the economy of corruption. Even this “moral purpose” is being questioned as politicians like Sharad Pawar are decorated with Padma Vibhushan awards instead of being asked what his party, NCP, did with its stash of Rs 1,000 and 500 notes. So, very soon, the harsh realities of economic survival will hit the bulk of the people who withstood the hardships of demonetisation.
Arun Jaitley’s singular challenge in the upcoming Budget therefore will be to provide succour to millions who have lost their jobs, especially in the unorganised sector. So far, the Modi government’s social policy and claims to driving welfarism has lacked conviction as demonstrated in detail by social sector analyst Yamini Aiyar’s recent article in The Wire. There has been a lot of lip service but very little done on the ground. One stark example is the Modi government’s much publicised programme of “har khet mein pani” which promised to provide irrigation infrastructure to nearly 57% of India’s arable land still dependant on the vagaries of rainfall. Agriculture economist Ashok Gulati asserts this one scheme, if properly funded, would transform both productivity and employment in the farm sector. Gulati believes this needs central fund commitment of at least Rs. 75,000 crore a year for 3 to 4 years. But the finance minister only allocates about Rs. 6,000 crore annually which is totally inadequate, he says. Similarly, the PM’s much publicised promise of delivering low cost housing for all citizens is also totally underfunded as it only promises some interest subsidy for bank loans upto a limit.
Modi is clearly high on rhetoric while most of his highly publicised social programmes are underfunded, whether in health, education, housing, digital inclusion or in operationalising the Jan Dhan bank accounts in remote villages. For instance public sector banks have employed over 1.5 lakh banking correspondents who are supposed to travel on two wheelers to remote villages with hand held electronic instruments to provide various financial services. The cost of the two wheelers, hand-held electronic machines and commission payments to 1.5 lakh banking correspondents was to be subsidised by the finance ministry. However, bankers say the finance ministry is yet to give any firm commitment in this respect. A senior banker said the ministry is now trying push a lot of these costs onto the PSU banks which are already under severe strain after demonetisation. One top banker said the prime minister is using PSU banks to subsidise his politics. One can cite many more examples of severe under-funding of social projects by the Modi government.
After demonetisation, the need to activate various social projects with adequate funding has become much greater as this is the only chance Modi has to salvage his government’s welfarist image; having survived largely on sloganeering so far. The economic pain at present is too much for mere rhetoric to work. Of course, one reason why Modi does not fully fund these social projects is his need to keep global finance capital in good humour as international credit rating agencies draw their own “lakshman rekha” on fiscal expansion.
As for the broader macro economy, the challenge for Jaitley will be to first repair the consumption demand after a reasonable amount of money comes back into the system. It is estimated that by March end, roughly 75% of the demonetised money should be back in the system in the form of new notes. The Budget will definitely give some tax sops to boost consumption. Still, consumption may take much longer to come back because the economic shock caused by sudden job losses in the unorganised as well as organised sectors will undermine consumer confidence which will probably take awhile to come back.
The other big challenge is to revive private investment which was already down even before demonetisation. Fresh investments will get postponed even more and will wait for the economy to repair. As Modi completes three year in office in a few months it is worth noting that there are hardly any billion dollar greenfield investments that have been put on the ground since NDA came to power.
No wonder one of the slogans coined for Akhilesh Yadav by a Samajwadi Party strategist is: “He talks less,works more”. The BJP must carefully study why such slogans are gaining currency.