"The Indian National Congress re-states its conclusion that the "demonetization" experiment of November 2016 will rank as one of contemporary India's most ill-thought and reckless economic misadventures. The scars of this bizarre and destabilizing act on Indian society will linger for long." - Economic Resolution of the Congress party, March 2018
Of all the Economic Resolutions of the Congress party in recent decades, the one adopted for the March 2018 plenary session was perhaps the strongest and harshest. I recall there was much animated discussion and concern about the economy among members of the drafting committee, chaired by Dr. Manmohan Singh. The slowing down of the economy was evident to anyone that cared to know. The reasons for the slowdown were also evident.
Yet, during the no-confidence motion debate in parliament in July 2018, Prime Minister Narendra Modi audaciously claimed that all was well in the economy with crores of jobs being created every year; he dismissed all talk of a slowdown as fear-mongering.
A year and a half later, it is now widely acknowledged by everyone that India's economy is in the doldrums. Nominal GDP growth in the most recent quarter was the lowest in 15 years, even lower than in 2009 after the global economic crisis.
It is true that a sharply slowing economy did not seem to induce voters to vote against the ruling party in the recent Lok Sabha elections. Either voters were swayed more by nationalism or religion than their daily daal chawal or the Congress party failed to propagate the message about the dismal state of the economy widely or, if they did, voters did not trust the Congress party's message. Whatever may be the reason, here we are - a dire economy with the same set of economic managers at the helm.
Dr. Manmohan Singh has recently outlined a five-step approach to restoring the economy. The Modi government would be remiss not to pay heed to one of India's wisest men alive, even if he belongs to a different political ideology. Dr. Singh has said that the first step is to for the government to acknowledge the gravity of the economic situation and not be an ostrich with its head buried in the sand.
India's economy is not a BJP-type organization that can be commanded and directed to obey their leader at will. Diktats like abolishing currency overnight or sending tax inspectors inside entrepreneurs' homes has not stopped black money or tax avoidance but instead has had severe disastrous economic consequences. India's 3 trillion-dollar economy cannot be managed through a moralistic framework of good versus evil. Neither can one 'diktat' an economic downturn away with dishonest statistics and media headlines.
The next step is to accept the ugly truth that demonetization, which wrecked supply chains and destroyed business confidence, is the root cause of this economic slump. The liquidity crisis caused by demonetization is now turning into a solvency crisis for many businesses as every intellectually honest economist had predicted when the move was introduced. India's manufacturing and exports economy is dependent on a vast network of small and medium-sized businesses that form its supply chain. This supply chain was the most affected by demonetization and a flawed GST implementation.
As a result, India's manufacturing growth is now almost zero, a first in recent history barring the 2008 financial crisis. India's exports experienced their slowest five-year growth in 2014 to 2019. For all the "Make in India" hoopla, launched in 2014 to boost domestic manufacturing, India's economy has only experienced a "Buy from China" syndrome in the last five years. In 2014, India imported the equivalent of Rs 3,000 worth of goods from China for every Indian citizen. We now import Rs. 6,000 equivalent of goods from China for every Indian. Token tax incentives or sector-specific sops are not going to suddenly transform Indian industry into being competitive with Chinese manufacturing and weaning us away from affordable Chinese goods.
Manufacturing, agriculture and construction account for more than three-quarters of all employment in the country. The slump in these sectors has impacted jobs and incomes of people. This has led to a loss of consumer confidence and triggered a slowdown in consumption, be it of Parle-G biscuits or two-wheelers. So what we have now is what economists term as a severe demand side problem where the demand for goods and services in the economy is slowing down sharply. If there is no demand, there will be no business activity, which further exacerbates the problem.
The solution then is to focus on the demand side and put money in the hands of people that need it the most. Money in the hands of the needy means that they would spend it immediately. Such spending would stimulate demand which would in turn stimulate business activity which would in turn boost jobs and incomes. This is the classic Keynesian stimulus, in economist speak. The Congress party's NYAY program announced in its 2019 manifesto was one such Keynesian demand stimulus program.
Where will the government get the money for such a demand stimulus program is the next obvious question. If the government commits itself to such a program, the money for it can be found. Raiding the RBI's reserves or tax terrorism are not the options. Monetization of the government's large reserve of idle and needless assets, other wasteful expenditure rationalization and a modest expansion of the fiscal deficit are plausible options to raise the money needed for such a program. Any large economy that has been ravaged by massive external shocks like demonetization and GST cannot behave as business-as-usual. It needs radical solutions and not tinkering at the edges. It is time to leave politics aside and come together to find solutions regardless of where or who it comes from.
The government needs to 1) Acknowledge the problem, 2) Accumulate wisdom and 3) Act decidedly. We owe this to the hundreds of millions of Indians whose very livelihoods are at risk.
(Praveen Chakravarty is a senior office-bearer of the Congress party.)
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