The growth in gross domestic product [GDP] during the first and second quarter of current financial year was 5% and 4.5% respectively. Given the trend during the remaining two quarters, the year is expected to end with growth of no more than 5%. This is a significant drop from an average of about 7.5% recorded over a 5 year period 2014-15 to 2018-19.
The drop during the current year is being blamed on ‘lack of demand’ with some commentators even arguing that demonetization and hasty implementation of the Goods and Services Tax [GST] led to demand destruction triggered by large-scale unemployment and erosion of income and purchasing power.
While, there can be no disagreement on ‘lack of demand’ argument, to say that this was caused solely by demonetization and GST [albeit hasty] is preposterous. Had there be any merit in this argument, both 2016-17 and 2017-18 [the years immediately following these reform measures] ought to have witnessed a serious set-back to the economy. But, that was not to be even as there was impressive growth of 8.2% and 7.2% respectively in those two years.
It was demonetization [announced on November 8, 2016] which forced people to deposit hundreds of thousand crore of ‘unaccounted’ money [income on which either tax was not paid or garnered from dubious activities including proceeds of bribery] in banks. While, on one hand, it enabled banks increase their lending, on the other, it led to unprecedented surge in number of assesses and tax paid. Even as higher tax collection helped the government spend more on infrastructure projects and welfare schemes, more credit gave a boost to economic activity in the private sector.
On the other hand, GST led to formalization of an economy that was predominantly informal forcing businesses to report their transactions, at the same time, enabling them avail of opportunities for instant bank credit, benefits under taxation as also timely settlement of their receivables. It also meant a much higher number of assesses and potential for boosting tax revenue. This is still works in progress with efforts being made to rationalize and simplify GST architecture, rein in fraudulent transactions and increase recovery.
However, the above does not mean that everything is hunky dory. The reality is that growth has slid and the government should figure out the reasons and take corrective measures. At the outset, two major factors come to mind.
First, developments in India can’t be viewed in isolation from the global trends. According to a recent forecast released by Moody Investors Service [MIS], the world economy is slated to grow @3% during 2019 as against 3.3% growth projected by it in April, 2019.
Second, Indian banks have been passing through an unprecedented crisis even as their non-performing assets [NPAs] had scaled a high of 11.6% of total loans by March 31, 2018. A massive cleansing operation along with capital infusion helped in reducing these NPAs to 10.3% as of March 31, 2019. But, the problem persists and it will take some time before normalcy is completely restored. Meanwhile, starting from early last year, a major crisis engulfed non-bank finance companies [NBFC] – or the so called shadow banks – with two major firms viz. Infrastructure Leasing and Financial Services [IL&FS] and Dewan Housing Finance Corporation [DHFCL] going bust.
In view of banks and NBFCs playing a dominant role in funding investment by corporate and financing consumer purchases [lending by NBFCs in particular, drives demand for real estate/housing, automobiles, consumer durables etc] and both afflicted by financial crisis, it was only natural to expect demand compression. The situation was exacerbated by bank managements becoming increasingly circumspect in approving new loans due to the fear of facing action by agencies in the event of any decision going haywire.
The government has made efforts to reinvigorate both these institutions through a series of measures such as Insolvency and Bankruptcy Code [IBC] [this enables banks drag defaulting borrower to the court and recover money in a time bound manner], bank recapitalization and provision for liquidity support to NBFCs etc. It is also taking steps to shield management against bonafide decisions going wrong [e.g. advisory board on bank frauds to vet transactions of above Rs 50 crore before the case is referred to agencies for prosecution].
To increase purchasing power in the hands of corporate and individuals, the government has also given a number of fiscal incentives. These include steep cut in the rate of corporate tax for new entities from 25% to 15% and for existing firms from 30% to 22%; tax relief to middle and lower income range [a person earning up to Rs 500,000/- doesn’t have to pay tax] and concessional tax regime for the self-employed have also been given. Under ‘presumptive tax’ scheme, persons with turnover below a threshold need pay tax on the presumed income taken as 6% of turnover.
While, the above measures along with the comprehensive overhaul of banks and NBFC will definitely give a big boost to demand – both investment and consumption – meanwhile, there is urgent need to attend to another major factor which plays a potent role in influencing growth but unfortunately has not received even an iota of attention in the analysis of most experts and commentators.
This has to do with the role of frauds perpetrated by dubious businessmen and corporate on the banks, NBFCs, home-buyers, depositors etc. A recent example will help illustrate the implications. In a far reaching judgment delivered on January 17, 2020, the Supreme Court [SC] has asked the union government to take over the leading real estate firm Unitech. The order contains the findings of a ‘forensic audit’ which show that of the Rs 14,000 crore home-buyers’ money, over Rs 5000 crore was diverted from projects for which money was taken and an further Rs 2000 crore is not even traceable. Put simply, 50% of the home-buyers’ hard earned savings were siphoned off by dubious management of the company.
In the case of Punjab and Maharashtra Cooperative Bank [PMC], nearly Rs 6500 crore belonging to tens of thousand depositors was siphoned off by promoters of a company called Housing Development and Infrastructure Limited [HDIL].
The media reports are agog with several dozens of similar cases each involving mis-appropriation of several thousands crore. The total money siphoned from the system would work out lakhs of crore. These mammoth sums are taken away from millions but gets devolved in few hands; a lot of that money even gets transferred to safe havens abroad. This stolen wealth concentrated in a few hand gets immobilized [stacked up in the lockers and bedrooms of these characters or used to bolster the economy of countries where it is transferred] and is of no use to Indian economy.
On the other hand, if, only this money had remained with millions of depositors, home-buyers etc [a scenario of no scam or embezzlement of funds], this would have generated huge demand for a wide range of items including home appliances, furniture, automobiles etc and services such as for carpenters, electrician, plumber, painter etc. The demand emanating from this source can far outweigh the contribution of other factors such as lower corporate tax rate, cut in personal income tax or increase in credit availability from banks and NBFCs.
However, tackling this bottleneck is a herculean task. Even as agencies viz. Central Bureau of Investigation [CBI], Enforcement Directorate [ED] are putting in their best to chase the fraudsters and recover money, the latter exploit all available loopholes in the law to delay the processes. That apart, our judicial system gives them ample opportunity to delay action. Besides, there are enough moles in almost every section of government machinery who are ever ready to lend a helping hand to continue their loot.
There is an urgent need for police and judicial reforms to ensure that the agencies are able to pursue such cases vigorously and court proceedings concluded speedily. Even more important, there is need for sustained awareness campaign to highlight the negative effects of these frauds and push for ‘social boycott’ of perpetrators of these crimes. The media in particular, should give prominent coverage to these cases and how they impact demand and growth.
As for opposition parties, instead of indulging in blame game, they should offer constructive ideas on how economy can be put in the fast growth lane.