Prime Minister Narendra Modi ended months of speculation by announcing a cabinet reshuffle on Sunday that saw four of his trusted ministers of state being elevated to cabinet status and nine new faces being added even as reports from government organisations had been hitting him on the slow GDP growth rate in the economy.
The Central Statistical Organisation announced a couple of days ago that GDP growth rate had hit a new low of 5.7% for the first quarter of Financial Year 2017-18 that is April to June this year belying hopes and optimism of the Finance Minister Arun Jaitley that growth would pick up and the first quarter could see 7% growth. GDP growth last year around same period was 7.9%.
How did a cruising economy slow down? The bolts from the blue appear to be the aftermath of the demonetisation of November 08 2016 and lack of proper preparedness of GST introduction by the government. Opinions however vary on this subject amongst economists even as government organisations such as the RBI, SBI, CSO and even the Chief Economic Advisor point their fingers at demonetisation and GST as possible causes.
Demonetisation sucked out about 21 billion notes of denomination of Rs 500 and Rs 1000 and replaced it with Rs 2,000 and new series of Rs 500 notes over a period of five months in FY 2016-17. RBI governor Urjit Patel had announced only a few days ago that 99% of the currency sucked out had been replaced.
But demonetisation appears to have crushed the unorganised sector which mainly deals with cash transactions. Cash transactions account for about 45% in the economy which government seeks to bring down with new regulations that cash transactions should not exceed Rs 10,000 at a time and that most financial transactions be done by the digital route using credit, debit, cards and cheques among other forms of the digital era.
The cabinet rejig might have temporarily diverted attention and brought new focus on the government as seeking to replace dead wood and encouraging performers. Suresh Prabhu, an intellectual, walks into the commerce ministry at a time when exports are dipping. Piyush Goyal takes reins of the Railways and Coal ministries at a time when railways are losing freight traffic to roadways as his counterpart surface transport minister Nitin Gadkari increases the length of national highways to transport goods faster.
A new face in RK Singh from Bihar is inducted into the power minister which would still be having only a MOS independent charge status instead of a cabinet minister as the nation is abundant in power but no takers as manufacturing activity has come to grinding halt.
Top bureaucrats walk into the government – Hardip Singh Puri of external affairs ministry who has spent his time in New York as India’s envoy to UN, a career IAS officer Alphonse Kananthanam and Dr Satya Pal Singh, an IPS officer from Mumbai had cleaned up the city of organised crime in recent times.
India came to attract world attention as the fastest growing economy of the world and with Chinas economy overheating with piled up inventories in the wake of global recession particularly in western Europe, the jolts from CEA, RBI and CSO on GDP growth are discouraging for further foreign investment flows.
Let’s take a look if the cabinet expansion is equal to the challenge of restoring the economy to its previous highs when Modi formed his BJP led NDA government with the nation-wide euphoria over his slogans against corruption and cleaning up the mess of UPA of policy paralysis and restoring growth. Everything went well: GDP looked up; manufacturing sector showed signs of recovery, foreign exchange inflows and portfolio investments were at a record high at over 350 billion USD. Suddenly the economy started screeching: Demonetisation of November 08 crushed the small sector and GST took many unaware of its deeper implications with its four layered taxation 5%, 12%, 18% and 28%.
Tweeting, noted economist Ajit Ranade said: ” a 1% lower annual GDP growth = loss of 1.5 lakh crore national income and loss of millions of jobs.” He wondered why despite “conducive” macro-economic factors including low inflation, manageable fiscal deficit, stable rupee, plenty of forex, record inflow of foreign investment, low oil prices, the country recorded GDP growth of only 5.7% per cent in the April-June quarter this year against 7.9% last year.
The latest GDP figures released by CSO may not exactly be the final one as it will be adjusted over the next couple of years because data from the unorganised sectors are yet to be factored in properly – these were hit hard by demonetisation.Unorganised sectors constitute about 45% of Indian economy. Data takesup to two-three years to trickle in.
Economists estimate that given the shock that demonetisation gave to the unorganised sectors, the GDP figures are likely to go further down. That means the 2nd quarter of June to September FY 2017-18 could also be bad if tail winds of demon and GST still blow on the economy.
The manufacturing sector has hit the lowest growth rate in five years. The manufacturing sector reported growth rate of 1.6 per cent compared to 3.1 per cent in the previous quarter.The sharp decline in the manufacturing sector is being blamed on the Goods and Services Tax (GST) reform and the unpreparedness of the economy to receive it. Though government announced several months before GST would be implemented from July 1 this year to smoothen the transition process, yet it resulted in most manufacturers de-stocking their inventories during period April-June this year.
As a result,trading went up during the period as sales went north due to discounted offers. April-June mostly saw stocks being cleared but no new manufacturing being carried out.
Even as GST took manufacturing by surprise with deeper implications with its four layered taxation ,manufacturing sector suffered also from a fall in capacity utilisation. The Federal Bank RBI in a report, released in March this year, indicated what was in store for the manufacturing sector.Capacity utilisation is measured in terms of how much productive capacity of a business is being used. The RBI report (March, 2017) stated that the average quarterly capacity utilisation rate was at 71% for the previous three quarters.
Capacity utilisation was calculated on the basis of production output of around 1,300 manufacturing firms – of which 952 were either owned by the government directly or through majority share in the PSUs, media reports indicate saying it saw a sharp decline over five years. It was 79% in the two years to fiscal year 2012. This dropped further over next two years to an average of 74% per cent by FY14. Presently, it is just around 70%.
One must understand that any decline in capacity utilisation automatically leads to investments dwindling triggering a slowdown in the economy. This has been witnessed in several sectors of the economy, experts claim. e same was witnessed in several sectors. Economists say that a decline in manufacturing sector seriously reflects on the off take in the domestic and foreign markets.Finance Minister Arun Jaitley claims the annual GDP growth rate would be around 7% basing his assumptions on revival signals in the international markets, where demand has risen in recent times.
However, a decline in domestic demand is necessarily accompanied by a rise in NPA (Non-Performing Assets. Banks and companies together have reported rise in assets which have turned loss-making. Because borrowing by companies have declined because of their wait and watch attitude of the economy.According to the RBI annual report, released Wednesday, the non-food credit off-take reached a low of 5.8% at end-March 2017, the lowest since 1994-95. Some reports say that overall credit off-take for July, 2017 was negative.The credit offtake scenario reflects that the industries are not sure about the future trends and consider any big investment in production as “not safe” on weak demands, reports circulating in industry claim as reported by the media.
To rein in rising fiscal deficit, the government has tried reducing public expenditure. However this has had a negative effect because it resulted in an overall decline in investment. Private investment has also taken a hit on weak market indicators.
Some reports suggest that the investment rate in India is at the lowest in 10 years. Low investment has hampered the growth of infrastructure, transport, health and transport sectors, which are the biggest job providers. Following demonetisation, loss of employment has become a major concern, however well intention a measure it was for Modi to root out corruption and cut terror funding.
Rough estimates claim demonetisation disrupted unorganised sector growth rate by 80% resulting in loss of lakhs of jobs. Economists claim that disciplined government public expenditure to face off fears from credit rating agencies has actually complicated matters. Immediate economic indicators don’t share the FM’s optimism of a pick up in growth in the 2nd quarter of the FY 2017-18 as predictions are of another phase of slowdown.
With Lok Sabha elections coming up in 2019, public expenditure is likely to see a massive push as government would seek to boost infrastructure, health, education, transport and manufacturing sectors in coming months. Clearly, Modi faces severe challenges in pushing up GDP growth , control inflation , increase growth in manufacturing sector, create more jobs, get the unorganised sector up on its feet again, over the next 10 months after which he has to hit the campaign trail for relection to a 2ndterm . Modi has to pull a rabit out of the hat, but will his new found cabinet deliver? (Feedback@email@example.com)
T N Ashok is a Corporate Consultant, Resident Editor and Writer of Economic Affairs