While supply side issues on the fiscal front are getting resolved, the ongoing social unrest is going to dampen economic prospects
The new year came with the release of Goods and Services Tax (GST) figures for December 2019 which showed a nine per cent increase compared to the previous year. This was the second consecutive month where GST collections crossed the `1 trillion mark. GST collections are an important indicator of consumption in the economy and a high indirect tax mop-up means that somehow the discretionary consumption must be back.
This is important, as throughout the year we’ve seen adequate slack in the economy which has dampened investment activity and further stressed balance sheets of companies, banks and other financial institutions. For the third quarter (Q3) of the Financial Year (FY), GST mop-up was only three per cent compared to the previous year. While this figure may not be great, during a slowdown even tax buoyancy gets hit and that’s perhaps why GST growth hasn’t kept pace.
However, with a nine per cent GST collection growth in December, one sees positive offshoots even as fresh vulnerabilities have emerged in the banking space. The underlying fact is that the Indian economy indeed bottomed out in September and this got extended till October, post which the economy seems to be in a recovery mode. This suggests that a V-shaped recovery won’t be possible and the pace of improvement is also slow but this restoration will come without much support from the monetary policy as prime real lending rates continue to be high.
While supply side issues on the economic front are getting resolved and the Government is undertaking steps to get things back on track, the recent protests are damaging India’s perception. We cannot disrupt temples of learning with the objective of subversion of democracy, even if through violence. The problem with such an attempt is that it has unintended consequences — and some of them are economic.
India, which is an attractive investment destination after the recent corporate tax cuts, is now being watched by international investors very closely. These protests are likely to adversely impact their investment decisions. This comes at a time when India is just recovering from the recent slowdown, which is not a good sign as it may hinder the pace of recovery.
The Chief Ministers of today would do well to take a page out of Prime Minister Narendra Modi’s conduct when he was the Chief Minister of Gujarat during the UPA regime. In 2011, when the economic slump started, Modi undertook a series of State-level policy interventions to attract investments in Gujarat. Consequently, Gujarat managed to be insulated from that economic slump and contributed to India’s economy while most other States seemed to be stuck with slower growth.
Another such State was Madhya Pradesh, which registered an impressive growth rate, primarily in the agricultural sector for many years. The question that often emerges is, if we have any such leaders at the State-level who can play a big role in economic recovery by ensuring a higher growth for their States?
We see the Andhra Pradesh Chief Minister squash previous contracts and the Maharashtra Chief Minister review critical infrastructure projects. Both these actions have severe implications for enforcement of contracts, the credibility of Government contracts and long-term ability to attract investments. Moreover, they will not improve growth rates in the short term.
State Governments aren’t even doing the bare minimum to ensure they can maintain their growth rates, forget about accelerating them. The problem of growth is as much political as it is an economic one. The lack of incentives, especially at the State-level, perhaps shifts the focus to other issues.
Another factor is the lack of economic literacy which prevents issues related to growth from becoming a major part of electoral campaigns. An exception to this is the issue of inflation and jobs — both of which are election issues and intricately related to growth rates. Lack of scrutiny of States on these issues in public discourse is perhaps a reason why necessary State-level policy reforms don’t happen as often as they should.
The GST data is indeed suggesting that despite these agitations, the economy seems to be getting back on track. Perhaps, once the economy starts growing at the rate of seven to eight per cent, many of people’s anxieties would be taken care of. But it is important to recognise that this revival of growth rate would have occurred without monetary support and the necessary State-level reforms. It is time the States did some introspection on their role in the economy and nation-building as they are also answerable to the people who put them in charge of their destinies.
(Writer: Karan bhasin; Courtesy: The Pioneer)