The finance minister Nirmala Sitharaman made a startling announcement on 20 September. She declared a drastic reduction in corporate tax. With cesses and surcharges included, companies were effectively paying 34.9 percent of their revenue in taxes. After the cuts Sitharaman announced, this rate would come down to 25.17 percent. In recent months, it has become clear that Indian economy is experiencing a worrying slowdown. The initiative was meant to counter this. The government likely expected that tax cuts would help shore up companies’ bottom lines, encouraging them to undertake measures that boost the economy—commonly, this includes doling out larger discounts to consumers, increasing workforces and bumping up capital expenditure, among others. The announcement sent markets into a euphoric frenzy, pushing the Sensex up by 1,800 points, its largest surge in five years.
Sitharaman had previously appeared keen to divert attention away from the slowdown. In early September, even after India’s GDP growth rate fell from eight percent to five percent in five quarters, the finance minister skirted questions on the economic decline during press interactions. Another example was her response to the crisis in the auto industry. In August, overall vehicle sales recorded the steepest fall in the 22 years since the Society of Indian Automobile Manufacturers, an industry body, began recording this data. Domestic car sales fell by a whopping 41 percent compared to August 2018. For the same month, commercial-vehicle sales dropped by over thirty-eight percent while motorcycle and scooter sales separately fell by a little over twenty-two percent each. In August, India’s largest personal-vehicle manufacturer, Maruti Suzuki, decided against renewing the job contracts of 3,000 casual workers, owing to a decrease in demand. In a regulatory filing in September, the commercial-vehicle manufacturer Ashok Leyland declared that the company would observe 52 non-working days—an unpaid day off for its workers—across its manufacturing hubs in India, “due to continued weak demand” for its products.
In mid September, Sitharaman claimed that sales of four wheelers were falling in part because millennials preferred cab-aggregators to buying cars and paying monthly instalments. Her comments served only as misdirection from the real reasons behind the decreasing demand. In fact, a survey of the age group in question contradicts the conclusive diagnosis that the finance minister offered. A 2018 survey of millennials by Mint and YouGov, a British market-research company, that engaged 5,000 respondents across 180 cities, reportedly found that a little over eighty percent of the millennials residing in urban areas aspired to own a personal vehicle.
Though the government’s refusal to acknowledge the extent of the slowdown was worrying, its solutions are cause for even graver concern. The government appears to believe that the ongoing crisis can be remedied by giving concessions to the corporate sector—effectively, that companies will pass on the benefits of the tax cuts to ordinary consumers, and that the money that the corporates save will trickle down into the economy. This is in line with the BJP government’s proclivity to favour corporates, but in reality, it is a misdiagnosis. It ignores the undeniable fall in demand across various sectors in rural and urban areas, and does not address the unorganised sector, which forms a significant part of India’s economy. At best, the government has an incomplete understanding of the trouble that the economy is in. At worst, it is not only favouring corporates, but is wilfully obfuscating the impact of two of its grandest policies: demonetisation and Goods and Services Tax, or GST.
The auto sector is only one of many sectors where consumers appear to be unwilling to purchase. According to Liases Foras, a body for real-estate and housing research, the top 30 cities in India had a total of 1.28 million unsold housing units by July 2019, an increase of seven percent from the previous year. The Economic Times reported in mid September that according to figures published by Kantar Consultancy, a market-research firm, the average consumer spending for online purchases was 21 percent lower in the January–June period this year, compared to the same period the previous year. The average ticket size—the average amount paid by a consumer in one purchase—dropped by 27 percent for the same period, while the number of buyers of mobiles and fashion products dropped by 17 percent and 16 percent respectively.
The revenue growth for companies in the FMCG domain fell from 16.5 percent between July and September 2018 to 10 percent in the quarter ending in June this year. For the same timeframes, the volume of sales declined from 13.4 percent to 6.2 percent. In the April–June quarter of the calendar year 2019, rural sales for FMCG companies grew only by 10.3 percent, compared to 20.3 percent for the same period in 2018. These numbers point to a worrying trend that the government does not seem to be taking into account: rural India is slowing down when it comes to purchases of everyday items.
According to the economist and writer Arun Kumar, the roots of the slowdown in the rural economy go back to demonetisation. Kumar is a professor at the Institute of Social Sciences, and was formerly a professor of economics at Jawaharlal NehruUniversity. “Immediately after demonetisation, work in the non-agriculture, unorganised sector really came to a halt and a lot of people from urban areas went back to rural areas,” he said. Kumar pointed to the increase in the demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act as proof. Between the financial years 2016 and 2019, the allocation for NREGA has shot up by a sizable 70 percent. In 2016, the government allotted Rs 35,766.75 crore for the scheme. In the latest union budget, as per revised estimates, the total allocation stands at Rs 61,084 crore.
“The NREGA demands show that people moving from urban areas to rural areas weren’t getting jobs. At the same time, there was distress in rural areas keeping the demand for NREGA high,” Kumar said.
A report published by the Centre for Monitoring Indian Economy, a business and economic research company, in February 2018 stated that three crore jobs were lost in the months following demonetisation. “The labour force shrunk by 30 million—from about 450 million before demonetisation to close to 420 million within six months of demonetisation,” the report said.“Now, more than a year later, we see a labour force that is close to 430 million. “The labour force has still not recovered entirely. Remonetisation by the RBI was not enough to bring labour participation to its earlier level.” The economic shock of demonetisation, CMIE said, “was deeper than can be measured merely by the injection of liquidity back into the system.”
Kumar argued that most of these job losses were from the unorganised sector. “If the unorganised sector—which employs 94 percent of the workforce—declines, then there is a decline in demand for food also which adversely impacts agriculture,” he said. Once demand for food declines, agricultural prices fall. Further, farmers are hit with a double whammy of declining food prices and an infrastructure for minimum support price that is limited in its reach. “The unorganised sector got hit, therefore the demand for food got hit, therefore farmer’s prices got hit, therefore demand from farmers for non-farm products also declined,” Kumar said.
Sunil Sinha backed Kumar’s conclusions. Sinha is a principal economist and the director of public finance at India Ratings, a credit-rating agency. He said that demonetisation and GST shook the unorganised economy, and subsequently led to the ongoing slowdown. “Forty-five percent of the total output in the economy actually comes from the unorganised and the SME”—small and medium enterprises—“sector,” Sinha said. “It is well known that the agriculture sector is passing through a crisis. With demonetisation and GST this unorganised and SME segment was adversely hit.”
In the period after demonetisation, “the general understanding was that the segments that do business mostly in cash would be impacted, however, as soon as remonetisation takes place, they would spring back to normal and it would be business as usual,” Sinha explained. “What happened is that demonetisation impacted the sector—particularly the ones that essentially deal with the cash economy—to such an extent that some of the businesses could only return partially or they could not return at all.”
But the GDP numbers from the months that followed did not capture the reduction in demand and jobs that had taken place. This, Sinha said, owed partly to the rollout of the seventh pay commission in 2016, which increased the expendable income for many consumers.
What worsened the impact was that “at no point of time was there a realisation or an admission within the government set-up that there is a serious issue,” Sinha said. He suggested that underpinning the government’s failure to address the disruption resulting from demonetisation was a conscious effort to deny its economic shock. “On the contrary, they kept emphasising the fact that it is part of the deep structural reform that the economy requires and this was followed up by GST.”
The GST, which aimed to bring a significant part of the informal sector into the formal sector, worsened the unorganised economy. “A large part of the informal sector is competitive and is able to do business because they are not part of the formal sector,” Sinha said. “The moment you bring them into the formal sector means that many of the taxes and liabilities that they were not having earlier, now they will have to bear them. Once they have to bear those costs, will they remain competitive? What measures has the government taken to do the hand-holding?”
According to Kumar, the structure of the GST is tilted significantly in favour of the companies that are already part of the organised economy. The GST introduced the concept of input tax credit—essentially, under this mechanism, businesses became eligible to deduct tax paid on the purchases of inputs or raw materials from the tax payable on the sale of the finished output. The balance is to be paid to the government. Companies are also eligible to sell or pass this credit on to other businesses they engage with. “The unorganised sector is hit because they don’t get input credit,” Kumar said. “They cannot give input credit. “So, even though the unorganised sector is exempt but the organised sector can give input credit, the demand is shifting to organised sector from the unorganised sector. This is a structural problem.”
He added that though the organised sector too had suffered due to the implementation of the GST, “it is the unorganised sector that has been unambiguously hit … The structural problem within GST cannot simply be tackled by reducing the rate or cutting down tax.”
Kumar noted that the existing structure of the GST was allowing for massive tax evasion as well. “The current structure of GST is so complicated that there are companies upon companies being set up to claim false input credit,” he said. “It is so complicated that it is easy to fudge.”
He added that the GST was, in fact, an outcome of lobbying by the organised sector, which stood to benefit from it. “The organised sector pressurises the government and the government gives concession,” he said. “Our MPs have passed the GST bill without understanding its full implications. It got fooled by the organised sector.” The unorganised sector, he added, “goes completely unrepresented.” Kumar said, “For two years, the government didn’t even recognise that the unorganised sector is suffering.”
Even when the government accepted that the GST and demonetisation had resulted in some adverse effects, Sinha said, “the narrative was that they have recouped in just about a quarter or two.” This pretense allowed the government to proceed without analysing whether these two policies would have a lasting impact on the economy, especially the informal sector. “Through out the period when the impact was being felt, the underlying current was never understood.”
Sinha said that the Modi government’s reelection in May this year had allowed it to dig its heels in further. The government took the election results as “a reaffirmation on the part of the polity that all they have done in the five years is correct,” he said. The first budget of the reelected government, presented in July, “also never admitted that there is a problem in the economy. The budget was presented as if it is a business-as-usual scenario.”
At the end of August, the Central Statistics Office, a government body under the statistics ministry, released data showing that the Indian economy grew by five percent in the previous year, its slowest growth rate in six years. The same day, the government unveiled that it was merging ten public-sector banks into four.
Sinha described this as “a bid to manage headlines” after the release of the CSO data. He said, “This is the worst kind of remedy you can think of when the economy is passing through a recession and the banks need to lend more, you get into a merger of banks.” Referring to the lending crisis that banks are facing, he said that banks were not willing to lend because they were unable to find credit-worthy parties. “To address that you do a consolidation of a few banks?” he said. “Over the next six months to one year, what these banks will do? Rather than focusing on lending, they will be busy working out their merger; rationalising the workforce.”
Kumar said that the government was aiming its reforms to spur growth at the wrong sector. A remedy to the slowdown, he said, requires the government to reorient its focus on the unorganised sector via various measures which include, among other options, higher MSP for farmers, creation of employment in rural areas and improvement in rural infrastructure. “Rather than give a package to the organised sector, start with the unorganised sector,” he said. “You have given Rs 70,000 crore to the banks for recapitalisation but they have extra liquidity. State Bank of India says we have Rs 1 lakh crore of loanable funds but demand is not there. Why would demand be there? RBI’s data shows that capacity utilisation”—the manufacturing and production capabilities that a nation or entity utilises at any given time—“in organised sector is 75 percent. As long as it does not rise up to 85–90 percent, investment will not revive. So, private sector investment will not revive till demand revives.”
Sinha said that “most of the policy prescriptions or announcements made by the government to address the current slowdown do not suggest that they have a full understanding of wherein lies the problem.” The government believes, he said, that the decline in auto-sector sales and other sectors can be addressed by listening to the people from that sector. “Obviously, these guys have nothing else to say to the government except that ‘GST kam kar do’”—reduce GST—“‘give us some sops’ and so on and so forth and the government is buying into it. But all these measures are addressing the supply side. Where is the attempt from the demand side?”
According to Sinha, the government should instead be striving to put more money into the hands of the consumers. “Because the day you do it he will feel enthused that my disposable income has gone up. There is no attempt to revitalise the economy looking at the demand side. Just reducing the car prices is not going to work,” he said. “Right now, the consumer is in a place where he has become risk-averse. So, if you want him to open his purse, he has to see real wealth in his purse.”