State of the economy has become the central theme of debate all of a sudden- both in media as well as informal discussion. The government also seems to have seized the issue going by prime minister Narendra Modi’s recent interaction with senior officials followed by the constitution of prime minister’s Economic Advisory Council. How is it that, all of a sudden, a crisis situation arose that made the government feel like going from advice from an economist, with hardly 18 months left for the general elections? It has managed three-and-a-half years without them.
Even if the learned economist come out with policy measures would the government, more so the one led by a shrewd political leader like Narendra Modi, consider them worth implementing? No government in the world goes for harsh economic reform measures during the last leg of the term unless it is in a suicide mood.
How is that the government woke up so late while warning signals have been coming at least during the last couple of the years- much before demonetization and GST? The day inflation rate fell below 2 percent, let alone negative inflation, policy advisor in the government should have alerted the prime minister and prompted him to act.
Unfortunately, inflation rate at around marginal level was showcased by the ruling party’s spokesperson as well as a few ministers as a great achievement.
Coincidentally, too low inflation rate also matched with poor industrial performance, especially the manufacturing sector. Instead of getting wake-up signals through this trend in terms of falling investment and consumption expenditure, perhaps policymakers in the NITI Ayog and the finance ministry have gone gung-ho with bulging foreign exchange reserves of over $400 billion and the Senses hovering around record 32,000.
Instead of misleading the prime minister, they should have understood that this trend in foreign exchange reserves as well as an upswing in stock market until the last year was mainly due to inflow of foreign portfolio investment while domestic investors, being aware of ground reality, were cautious enough to have ‘wait and watch’ approach. Foreign portfolio investors were looking at the Indian market mainly because their home market was not promising and hence looking for better investment avenue.
Of course, added reason was tremendous trust and expectations from the prime minister who is still considered a trusted business-friendly leader. Of course, the prime minister did not disappoint them as he initiated many bold steps. However, with the US FederalReserve reversing its quantitative easing policy, foreign institutional investors (FIIs) started moving home-ward as expected.
The government would not have to take the blame for the economic crisis had the people been taken into confidence- that too under a popular leader. Besides, the economy has been affected by external factors also which are beyond the control of any government. Apart from a slowdown in the economy of our major export destinations such as the US and Eurozone, protective approach by the new regime in the US should have given sufficient hints about the likely adverse effect on our economy.
Some of the experts blame disruptive measures such as demonetization and GST. This is an entirely debatable matter. No doubt, demonetization has adversely affected consumer demand not only due to cash crunch but also due to cleaning up the process. If we are looking for the transparent transaction and clean business environment n terms of long-term interests people should be prepared to pay a small price in short-term.
In fact, people have stood solidly behind the prime minister and bravely faced inconvenience in the overall interests of the country. Goods and Services (GST) along with Bankruptcy Code are the other disruptive game changers initiated by the government. In the case of GST, had the government struck to the suggestions made by the Tax Reform Committee and the Finance Commission, probably, there would not have been any room for confusion. The very idea of GST is to simplify the tax system with one-tax-one-market principles it is the practice in the countries gone for the tax reform- may be with the odd exception of Brazil.
This government’s big problem is intellectual bankruptcy and relying too much on the bureaucracy who have no political stake. Unfortunately, an even spokesperson in the ruling party fails to take credit for the government’s achievements. Whatever may be the criticism against demonetization by the vested interest, attack in terms of the government’s failure to detect black money is a totally foolish argument. Unfortunately, even critics like former finance minister P Chidambaram, who is otherwise considered intelligent, attack the government on the ground that 99 percent of the demonetized currency notes have come back into the banking system and they foolishly argue that there is no black money.
On the other hand, the government should be congratulated for this fantastic success in getting back the black money trapped within the banking system. Now, it is for the income tax officials to identify black money within the declared income- once they start probing source of income.
In retrospect, the government need not feel guilty as hardship in the economy is mainly due to external factors. With regard to domestic factors, such as demonetization and GST, these are the bold steps causing short-term pain for the long-term gain in terms of transparent business environment and governance. But the government has to take the general public into confidence by admitting the crisis instead of trying to cover up under technical glitch.