Farmers have been protesting across the country from Tamil Nadu to UP and Punjab. They are committing suicides on a daily basis as they are falling into debt trap. Farmers mostly belong to the unorganised sector of the economy. The NDA government on coming to power promised doubling of their incomes by 2022. During the campaign for the 2014 elections, they were promised the implementation of the Swaminathan Committee Report. They were told that they would be given a price 50% above costs. However, the bone of contention has been which ‘cost’ and how to implement the Minimum Support Price (MSP) scheme across the country.

The farmers have faced drought and a fall in their incomes. They have also seen their incomes collapsing due to demonetisation and the consequent shortage of cash. Where the rains have been good, prices have collapsed, like, in the case of pulses, tomatoes and potatoes in 2017, while the government has not been willing to make the necessary investment to procure these crops at MSP. On the other hand, costs have risen all around. Farmers have been forced to borrow at higher cost due to lack of access to bank loans. Cash shortage meant that they had to buy inputs on credit from the traders and had to pay a higher price.

Due to cash shortage, the purchasing power of the people employed in the unorganised sector went down and that meant that they bought less of the higher value agricultural produce. Prices of pulses, vegetables and fruits fell drastically after demonetisation and did not recover for some time. This hit the incomes of a large number of farmers. It also appears that the traders took advantage of this situation and the farmers are still in their grip one and a half year after demonetisation.

In effect the ongoing crisis in the farming sector has deepened during the NDA regime with farmers protesting and demanding justice. They are demanding loan waiver and remunerative prices but the NDA government is not able to fulfill their demand.

4. The Big Policy Decisions and the Shocks to the Economy

As argued in the Introduction to this essay above, the NDA regime administered two big shocks to the economy and brought down the growth rate of the economy. These shocks also deepened the crisis in agriculture, banking, trade and the unorganised sectors as a whole.

The first shock was the sudden demonetisation of the high denomination currency notes on November 8, 2016. Since they constituted 86% of the currency with the public, there was a huge shortage of cash in the economy which meant that businesses slowed down, especially in the unorganised sectors of the economy which have little access to banks and electronic means of conducting businesses.

The currency shortage persisted for months, way beyond the 50 days given for exchanging the old currency for new. The entire currency is back with the RBI, as this author has pointed out and which was later confirmed by the RBI. So, no black money was caught, but a large number of people who had never generated any black money were put to a great deal of inconvenience. They could not even withdraw their own money, some died due to the stress, marriages got postponed, patients could not get proper treatment, etc. The slowdown in the economy turned into a recessionary phase with decline in output, employment and investment.

As if this was not enough, the government then introduced GST, and that too without proper planning as it was too busy coping with the fallout of demonetisation. This has created problems for businesses even in the organised sectors. It further set back the unorganised sectors because of the complexity of the new tax and its flawed design. Thus, the entire economy again slowed down.

Even though the tiny and the small sectors are largely exempt from GST, they have been adversely impacted by the faulty design implicit in input credit and the reverse charge systems. The e-way bill system is also creating complications for the GST. Further, on items of daily consumption, the tax rate is kept at zero, so that the prices of goods of common use do not rise. But all prices have risen. This is a result of the fact that the indirect taxes are felt at a point other than where they are levied. For example, if the price of trucks rises due to higher GST, then the cost of transportation of wheat will go up and its price would rise even though there is no tax on wheat.

GST also undermines the federal structure of the country. There is one tax rate for a given good / service all across the country. However, India is a diverse nation with different needs of different states. What is required by Tamil Nadu may not be good for Himachal and what may apply in Gujarat may not be appropriate for Assam. India is a union of States, each with their own needs which they are supposed to take care of in their own way. That is why autonomy was enshrined in the Constitution. But it is now getting eroded. Finally, the third tier of government has been left high and dry. There is no mention of the local bodies. This runs counter to the idea of decentralisation which is so essential for democracy in India.

5. The Claimed and the Actual Growth Rate of the Economy

A key problem facing the Indian economy for the last 3 years is that the data on the basis of which policy is being made does not reflect reality. Some economists have stated that the rate of growth was artificially boosted by 2% due to change in methodology after 2012. In other words, the actual crisis is being hidden behind the smokescreen of data. But this change in methodology was initiated by the UPA itself. That is why the low rate of growth during the last years of the UPA regime was also boosted by 2%.

If the current rate of growth is more than 6%, it is still one of the best in the world and there is no crisis. It is a healthy rate of growth by India’s own historical yardstick. This should have produced a ‘feel good’ in the economy. But that is not the case, with businesses complaining and NPAs continuing to rise. So, is the data hiding reality? Why is the government repeatedly talking about boosting the growth rate?

This author has been arguing for over a year that the current rate of growth is not more than 1%. What is the evidence that the actual rate of growth is around 1% and not 6%? This has to do with the erroneous methodology used to estimate quarterly rate of growth of the economy. The estimates given are advance estimates and provisional estimates that are repeatedly revised. They are largely based on projections from the past, which is not a correct methodology if there is a shock, and the Indian economy has had two of them as pointed out above.

The quarterly rate of growth of the economy is estimated by resorting to data largely from the organised sectors of the economy and that too from select corporate firms. Thus, at best, it represents only organised sector growth. The data for the unorganised sector constituting 45% of GDP comes with a time lag. It is based on surveys conducted in reference years once every few years. In between the reference years, the ratio of the organised and the unorganised sector is used to project the growth of the latter. In effect it only gives the growth of the organised sector. This methodology fails if there is a shock to the economy and the ratio between the two sectors changes. The method applicable till November 7, 2016 would not apply after November 9, 2016.

Since no comprehensive official survey has been done of the unorganised sector during the initial months after demonetisation or in the first few months of implementation of GST, the impact of these two policies on this sector will never be captured in the official data.

According to private surveys done during the period of demonetisation, the impact was found to be consistently dramatic, showing an adverse impact of between 50 and 80% and an increase in unemployment. This is significant since 93% of the workforce is in this sector. This led to a drastic fall in demand. According to RBI, capacity utilisation in organised industry fell. Even before demonetisation, capacity utilisation was hovering at between 70 and 75%—a low figure. Demonetisation further adversely impacted investment, as data suggests. In turn, this slowed down the growth of the economy even after the note shortage ended.

Even if the unorganised non-agriculture sector output for the year declined by 10%, while the organised sector grew at the official rate of 6%, then the average rate of growth for the year would turn out to be less than 1%.

The introduction of a faulty GST and its poor implementation has led to a deep adverse impact on the unorganised sector from July 1, 2017. The organised sector which was expected to gain from GST has also been hit hard for the same reasons—poor design and poor implementation. Instead of ‘ease of doing business’, business became more difficult. There was utter confusion, massive increase in paper work and increase in compliance costs. This has adversely impacted the climate of investment and led to a further slowdown in the economy.

In short, there is inadequate data to assess the actual performance of the economy. Government will keep claiming that things will improve on the basis of the limited data it has—as usual, the golden period is always ahead. The international agencies, like the World Bank, IMF, ADB and Moody’s, which are supporting the government’s contention of a high growth rate do not collect data independently and depend on government data. So their assessment is not an independent view.

The drastic slowdown in the economy is also indicated by the collapse in credit off-take by industry. Low credit off-take suggests that production and investment have slowed down. In October 2016 it was already at its lowest point in the last 50 years, and it fell to its lowest level in 60 years after demonetisation was announced. Worse followed with negative growth in July and August 2017. This has never happened before in the Indian economy.

Interest rate cuts have been suggested as a panacea but this does not work when demand is short and capacity utilisation low. Will demand pick up with cut in interest rates? It is argued that the demand for white goods bought on loan can rise (due to a lower EMI) and so can the demand for housing. But these are discretionary purchases and will only be undertaken if the sense of crisis in the mind of the public is overcome. In times of crisis, the public becomes cautious and does not increase its purchases or invest in these items. If people feel that their incomes are falling due to rising inflation or that their job is uncertain, they would not increase expenditures on discretionary items, in spite of a lower EMI.

The investment climate has also been vitiated by the constant attack on businesses after demonetisation. Not that they are paragons of virtue but what they do does matter to the economy. There is an attempt to brand those who deposited money in the banks during demonetisation as black money holders. This is being done to claim success of the failed demonetisation. While some who deposited large sums of money indeed were laundering their black money, the indiscriminate character of the move to brand everyone has vitiated the environment. Added to this, GST has created uncertainty about input credit, additional paper work, e-way bill, etc. and this has vitiated the investment climate further. So, ‘ease of doing business’ is not visible.

The government itself sensed the brewing crisis. It revived the Economic Advisory Committee to the PM. This is a vote of no confidence in the Ministry of Finance which is primarily responsible for economic policies.

If the actual rate of growth of GDP is close to 1%, then a small increase in the fiscal deficit to boost demand would not do. It would have to be raised by a much larger percentage to raise the rate of growth to 6%. The purists suggest that this would dent private investment. That would have been true for an economy where credit off-take was robust and the economy was running at full capacity. But that is not true, so a higher fiscal deficit is feasible to mitigate the economic crisis.

The present situation in India is similar to the one during the global crisis of 2007–08 when the world economy went into a recession and was prevented from going into a depression by the major economies raising their fiscal deficits. The US raised its fiscal deficit from 3% to 12%. China went in for a $600 billion expenditure package on rural infrastructure. India escaped the recession and had a healthy rate of growth of 5% because of increased spending in rural areas based on a large increase in its fiscal deficit. The FRBM act was put on hold.

6. Two Circles of Growth

The government has presented data on the growth in the automobile sector and travel by air to argue that growth is robust. The moot point is that do the poor in India consume any of these? Further, a total view cannot emerge from citing growth of some sectors. If some sectors are growing fast in a slowing economy then other sectors must be declining. It is the poor belonging to the unorganised sectors that have been hit hard by both demonetisation and GST, as argued above.

Today there are two separate circles of growth, with one growing at the expense of the other and leading to widening disparities. It also enables the government to ignore the unorganised sectors.

The unorganised sectors are also hit hard by inflation. The wages of the people working in these sectors are not indexed and tend to lag behind inflation, so their purchasing power falls when prices rise.

Official data claims that inflation rate is low. Unfortunately, the inflation data does not give the true measure of price rise. Most of the services are not counted in the index of inflation. So, if school fees go up or health costs rise due to a deteriorating environment, they do not get counted. With privatisation, these costs have been shooting up even for the marginal sections.

Should the decline of the unorganised sectors not have an impact on the organised sectors and reflect in their slowdown? Not if the latter is growing at the expense of the former. They are increasing their market share.

The government is also talking of financial inclusion and digitisation to help the unorganised sectors. The Jan Dhan Yojana and Mudra are supposed to give access to banks and to credit. However, those who do not have enough to eat and are in debt to private lenders are not going to put money in savings accounts. No wonder most of the Jan Dhan Accounts have zero balance. RTI revealed that many bankers put a few rupees into these accounts out of their contingency funds. And as already discussed, Mudra scheme is unlikely to have made any great impact on production and employment.

The government while pursuing a pro-business agenda needs a fig leaf of helping the poor as well. So, it keeps announcing marginal schemes for the poor and the farmers without impacting their status. But this is nothing new, given that this has been the case since independence.

7. Conclusion

When it came to power in 2014, the NDA took over an economy that was recovering from the macroeconomic shock it had experienced in 2012–13. However, it administered two big shocks in the shape of demonetisation in November 2016 and introduction of GST in India in July 2017. Both of them led to a crisis in the economy, more particularly in the unorganised sector of the economy which produces 45% of the nation’s output and employs 93% of the workforce. Consequently, an economy that the government claimed to be the fastest growing economy in the world in October 2016 collapsed and its rate of growth fell to less than 1%.

The official figures do not show this steep decline since the quarterly growth rates are based on corporate sector data. Even if this is taken at face value, as in the attached graph, the trend rate of growth has been declining since 2014 while for the few years before that, it was rising. This is partly a result of the twin shocks.

The many promises made by the party in power and the government in the last four years remain unfulfilled, like, curbing the black economy. The government has been high on hype but weak on delivery. For instance, the PM stated that demonetisation was an attack on the black economy but data shows that all the money came back and the black economy continues to flourish. It only caused hardship to those who never generated any black incomes.

The ruling party has not been able to check the corruption of its own party people, like, those involved in iron ore mining scams, VYAPAM scam, DMAT scam, and so on. While spectrum was auctioned as required by the Supreme Court, many court cases have fallen through since the cases were not properly presented in the Courts. Big new scams are beginning to surface, like, Neerav Modi, Rotomac and Bank of Baroda cases. Many smaller scams are erupting on a daily basis, like, the question paper leakage, IDBI and other bank frauds.

It has been pointed out above that the impact of the two shocks and the pro-business policies has been felt largely in the unorganised sector. This has created two separate circles of growth. The organised sector is growing at the expense of the unorganised sector. Consequently, the majority is getting marginalised and that is aggravating the already high inequalities in the country. This is effecting demand in the economy and leading to low capacity utilisation in much of industry, especially the mass consumption items. The government data showing rising sales of automobiles and increase in air travel pertains to the consumption of the well-off. The low capacity utilisation results in reduced levels of investment in the economy.

The rate of inflation has moderated but that also represents a weakness of the economy—demand from the unorganised sectors has declined. Further, our inflation data does not take into account the rise in prices of services and they are the ones that have risen the most in the last few years due to rise in the tax on services. Thus, the actual rate of inflation is higher than that given out by the government. The farmers are the worst hit by the collapse of the prices of agriculture products. Thus, inflation rate being low has multiple impacts and is not an unmixed blessing. The government is unable to manage all these factors simultaneously.

The improvement in the current account deficit of the external sector is a result of relatively favourable international factors, especially the fall in crude oil prices. This may now be reversing. This has little to do with policies. In fact, experts have criticised the government for not managing the advantage it got earlier to provide long term stability to the economy.

Employment is the big problem today. The educated youth are facing a crisis because they are not getting the jobs appropriate to their skills. Artificial Intelligence, mechanisation and greater protectionism in the US are posing threats to employment generation. Farming continues to face a crisis and suicides are continuing. The Fiscal Deficit is declining under the pressure of international finance capital to the detriment of the poor and underemployed. The crisis of NPAs in the banking sector has been growing, leading to the twin balance sheet problem and that is another reason that investment is not picking up.

The government has to stop being in denial about the nature of the current crisis in which output, prices, investment and employment are all hit. The economy is facing the consequences of that denial now. With the government bowing to international finance pressure and not willing to take bold pro-poor steps, the situation is in all probability going to get worse, despite all the propaganda of the government about its achievements in its four years in power.