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The ruling dispensation in India is facing a crisis of low growth, protests by major sections of the population – farmers, youth and traders – and criticism about non fulfillment of the many promises it has made. It has announced many policies but not only is their implementation tardy, many of them are a continuation of the past policies under different names. This is another kind of policy paralysis which UPA II was accused of. To counter these criticisms, the government has been highlighting its achievements by comparing the present performance of the economy with that of the UPA II.

No doubt the situation today is not what it was in 2012-13 when there was a macroeconomic crisis. But presently a crisis confronts the nation, triggered by two shocks to the economy – due to the demonetization announced on November 8, 2016 and implementation of GST from July 1, 2017. So, the present crisis is a different macroeconomic crisis than the earlier one because it is policy induced – that is the damaging part. It is brought about by ill thought through policies.

  1. What NDA Inherited in 2014

In May 2014, the CPI inflation rate was at about 9%. The quarterly rate of growth in the second quarter of 2014-15 when the NDA government took over was a high of 8.5%. It had recovered from a low of 4.5% in the last quarter of 2013-14. The growth data are based on a revised method of estimation. The Current Account Deficit in external trade was at 1.7 % in 2013-14 and had recovered from a low of 4.8% the year before. The Fiscal Deficit of the Central government in 2013-14 was at 4.5% while it was at 4.9% the year before. The Foreign Exchange Reserves were at $ 304 billion in 2013-14 as compared to $292 billion the year before. Thus, there is no doubt that the economy faced a macroeconomic crisis in 2012-13 but it was recovering from that crisis in 2013-14, just before the NDA government took power in May 2014.

The economic crisis during the UPA regime was triggered by national and international factors. Nationally, there was a loss of confidence in the economy due to policy paralysis brought about by the revelation of massive corruption cases and the massive people’s movements that started in 2010-11. People linked the high levels of prices to corruption brought about by crony capitalism – what went into the pockets of the corrupt came out of the pockets of the public. Droughts led to decline in agriculture and distress among farmers and also higher prices.

At the international level, high crude oil prices and low growth in major economies resulted in declining levels of exports and Balance of Payment (BOP) difficulties. Rising crude oil prices meant a larger import bill,higher trade deficit and inflation. It also led to higher levels of subsidies which meant a higher level of deficit in the budget. The macroeconomic problems led to lower levels of investments in the economy, lower levels of employment generation and crisis in the lives of the young who could not get jobs commensurate with their training. The youth looked for a leader who could get them out of the morass they found themselves in.

  1. Government’s Performance since 2014

The NDA government in May 2014 was lucky to inherit an improving macroeconomic situation. Crude oil prices moderated, drought abatedandthe advanced countries growth picked up so that exports improved. In 2018, the CPI rate of inflation is down to about 3%, the rate of growth is at about 7% (official data), fiscal deficit of the Central Government is down to 3.6%, foreignexchangereserves are at $402 billion and the Current Account Deficit at -0.7% of GDP. The PM has argued that the sales of passenger vehicles has grown by 12% and that of commercial vehicles by 23%. Domestic air travel has increased by 14% and international air freight traffic by 16%. This growth is on a low base. But, even if it is taken at face value, none of these pertain to the unorganized sectors of the economy. They reflect the growth of the better off sections.

The lower crude prices resulted in lower energy prices and lower levels of inflation. It also resulted in lower import bill and not only lower levels of subsidies from the budget but increased tax collections due to higher excise and sales tax. All this led to lower current account deficit, higher capital flows and higher foreign exchange reserves and lower level of deficit in the budget. However, the farm crisis and the employment crisis are continuing in spite of the much better macroeconomic conditions that the NDA regime has had.

So, why has a better macroeconomic situation not led to improvements in the conditions of the marginalized sections of the country? Income and wealth disparity is on the rise with the top few per cent cornering all the growth in the economy. According to OXFAM, the top 1% in India own 73% of the wealth while the bottom 50% hardly saw any increase in their wealth. The World Inequality Report of 2017 shows that the top 1% of the income earners got 22% of the national income. This does not include the black incomes that these people generate. If that were to be included, their share of incomes would shoot up to almost 50% of the national income.

India has been experiencing marginalizing growth for a long time and this process is only accelerating with the pro-business stance of the NDA government. It is creating two circles of growth in the economy with the organized sectors growing and the unorganized sectors in retreat. This has been the aggravated by the twin shocks to the Indian economy since November 2016. So, even if the growth rates rise, the situation of the marginalized does not improve.

India embarked on the `growth at any cost’ strategy with the New Economic Policies in 1991. The burden of this growth has been borne by the workers, farmers and the environment. This has meant that the growth has been based on the prosperity of a narrow section of the population and not the entire population. The worsening income distribution has led to an unstable economic climate which has also translated into an unstable political and social situation.

Rising disparities mean that the mass demand from the bulk of the population rises slowly and growth depends more and more on investment and the consumption of the well-off sections. The stock market boom and the rising wealth effect for the well-off spurs their consumption. Post 2007-08 global economic crisis both these stimuli weakened and growth rates fell. The NDA in its four years has not been able to revive demand and investment since disparities have continued to rise and the twin shocks of demonetization and GST have aggravated the disparities as discussed below.

In India, investment and especially private corporate investment has been much less than what it was in 2007-08. This is due to lack of broad based demand. RBI data shows that capacity utilization has been hovering at around 70-75%. No wonder private investment is tepid at best.

  • Analysis of Some Key Aspects of the Economy

III.1 NPAs of the Banks

The massive buildup of NPAs in the banking system of the country and especially in the Public Sector Banks has further crippled their capacity to lend. According to the latest Economic Survey, the Gross Non Performing Advances (GNPA) `ratio rose marginally from 12.5% to 13.5% between March and September 2017. Stressed advances ratio of PSBsrose from 15.6% to 16.2% during the period.’In March 2014, these were 4.4% according to the Economic Survey of 2014. It was 2.09% in 2008-09. So, there has been quite a sharp increase in NPAs since 2008-09 but most of the increase has been in the period after 2014. What are the reasons?

Most of the NPAs relate to the sickness in the infrastructure sector, steel, mining, aviation and textiles. India has gone in for high cost infrastructure which the poor can ill afford. For instance, the government is going in for a bullet train between Mumbai and Ahmedabad. Its viability is in doubt since the tickets will cost as much as an airfare, so that only the well-off can use it. When much of the railway infrastructure is woefully weak and in urgent need of improvement, to go in for such a project can only be for prestige (and ego) and not for sound economic reasons.

A package of investment in the banks to boost their capital has been announced but that will not resolve the problem since it emanates from default by industry.

III.2 Black Economy Continues to grow

A major part of the NPAs relate to corruption and widespread crony capitalism prevailing in the banking system. The appointment of the top brass of the PSU banks is based on political and bureaucratic consideration. They are open to political pressures to oblige businessmen with connections. So, scrutiny for loans has often been cursory and without proper risk assessment. This has not changed during the NDA regime since 2014.

Nirav Modi scam is the biggest one to surface but many other smaller ones are being unearthed with great regularity, like, the Rotomac case. In 2015, a Rs.10,000 crore havala with Dubai and Hong Kong was reported via a private bank in Surat. In 2015, fraud was detected in Bank of Baroda Branch in Delhi wherein Rs.6,000 crore was transferred to Hong Kong, like in havala.

The problem of crony capitalism is not confined to the PSUs but as the recent ICICI case shows that it is also happening in the private banks. In the case of the private banks there are favourites who get easy loans. Investigation is going on into this case which originated a decade back. This is a case of conflict of interest. Curiously, a whistle blower was pointing this case since 2016, action has only been initiated recently. Even the media did not pick this up.

During the UPA II rule, massive cases of Corruptioncame to light. The black economy continued to grow and aggravated the growing inequality. NDA came to power promising a cleanup andeasing of the tax burden on everyone by bringing back the black money held abroad. It boldly promised that every family would be able to get Rs.15 lakh. The BJP President admitted that it was a `ChunaviJumla’, meant only for the elections. Not even Rs.5,000 crore has been declared under the Foreign Money Laws promulgated (with draconian provisions). If distributed to the 26 crore families each would get Rs.200 but even this is not likely to happen.  This has been a huge disappointment for the many poor who opened a bank account under Jan Dhan Yojana in the hope that they were soon going to get free money.

Corruption and black income generation have not declined if one is to go by the scams that are now coming to light. It takes a bit of time for the scams to get exposed. The Congress party is accusing the government of a scam in the huge Rafael deal. During UPA I few major scams came to light and what was exposed during UPA II related to the earlier UPA I regime. The reason is that in all major projects money is made and it takes a while for them to be unearthed – usually when a whistle blower comes forward. They are being dissuaded since many of them have been threatened and bumped off. They get scant protection against the powerful vested interests. In the case of the huge VYAPAM scam, 48 people linked to it have died. In this NDA regime, if the big bullet project or the highway construction projects have any payoffs, this will come to light in due course of time. Till then the governmentmay look clean.

Black economy is also linked to the flight of capital from the economy. As the Nirav Modi case shows and the revelations under the Paradise and Panama Papers indicate, flight of capital continues unabated. So, a poor country which is short of capital for investment in essentials like, education and health is losing capital. The government has tried to renegotiate the double taxation treaty with Mauritius and Cayman Island to stop round tripping but it seems to be of no avail since the sharp operators and the havala channels have created newer paths. The setting up of the SC monitored SIT to unearth black money has been functioning for the last 4 years but it seems to have made little headway in denting the black money generation or its flow abroad. It has submitted a few reports but they are not public.

The government took other major steps to check black income generation like, the Income Declaration Scheme (IDS) and demonetization but they have not helped to check the black economy. GST is supposed to also help check black income generation but reports indicate that a large part of the business is still going on in cash and not via the formal channels. It was hoped that digitization would help but as expected its pace is slow and the black economy persists.None of the steps taken take care of the real cause underlying the black income generation, namely, the political aspect which is not getting cleaned up.

III.3 Challenges Regarding Employment

Given that investment is not very buoyant and black income generation continues apace, making the economy inefficient, employment generation remains weak.

The problem in India is that there is no social security so that workers cannot afford to remain unemployed. People do whatever they can – sell a little of something on the road side, drive a rickshaw, do head load work and so on. These people get work for very few hours a day and earn very little in doing so. Thus, there is massive under employment but hardly any unemployment (the way it is officially measured)since everyone is counted as employed one way or the other. But it is clear that many in the work force do residual jobs.

The Indian economy consists of the organized sector employing about 6% of the work force while the rest are in the unorganized sectors doing mostly marginal jobs. A large part of this unorganized sector is the Micro units which is counted under the MSME sector. The Micro units constitute 99.5% of the sector and they employ 97% of the work force with an average of 1.7 persons per unit. The remainder of the unorganized sector is in Agriculture with 46% of the work force. All of these workers work at very low wages.

If the organized sector employment had been expanding, it could have absorbed more and more of the workers from the unorganized sectors. But this is not happening since the organized sector is going in for massive automation. Further, since its share in GDP is rising, the unorganized sector is getting marginalized and so are its workers. Finally, the organized sector is utilizing contract labour which is not directly employed by them so that they can cut social security costs and by making them work longer hours and without proper safety precautions, save on costs. Contract labour is provided by contractors who keep them temporary and they are counted as unorganized sector workers.

Of late, the government has claimed that there is a massive increase in employment of between 7 million and 15 million new formal sector jobs. This argument is being put forthsince employment is likely to be a major issue in the upcoming national elections in 2019. If there was such massive employment generation in the formal sectors, why would 23 million people apply for 90,000 low skill jobs in Railways or lakhs of young would apply for a few hundred jobs of peons or scavengers in UP, Madhya Pradesh, etc. Engineers, MBAs and M.Com. appliedfor such jobs – totally incommensurate with their degrees and the skills they are supposed to have acquired. The truth is that they are doing some other menial job and wish to go for a government job which at least gives them security. This is a reflection of the problem ofunder employment.

The official claims of new jobs are based on two factors. First, they are counting the number of new registrants under Employees Provident Fund (EPF) and other formal sector pension (NPS) and Insurance (ESIC) schemes. Secondly, they add the number of potential jobs that may have been created under the Mudra Scheme. It is said that about 11 crore people have taken loans under the scheme and even if one third of them generate 1 additional job then about 3.5 crore new jobs would have been created. Thus, officially it is being projected that there is no employment problem and the issue is only political.

Under the Mudra scheme, the average loan taken is about Rs.45,000. This investment is likely to have substituted the more expensive private loans that may have taken earlier. Further, this may lead to an increase in the productivity of the person taking the loan. Say,a shift from doing head load work to keeping a cow for milk. Finally, it is too small a loan to increase employment even in the micro units where the average employment is 1.7 per unit with an investment of up to Rs.5 lakh. So, this loan may have helped reduce under employment but it is unlikely to have led to more employment except at the margins -nowhere near the claimed 3 crore new jobs.

The government is also pointing to new taxi drivers under the taxi aggregators and new delivery boys due to e-commerce and so on. The issue is how many of them are former taxi drivers at the taxi stands and how many small stores have retrenched staff due to fall in business consequent to increase in e-commerce. As always, governments claim that investment leads to an increase in employment but does not tell how many jobs are lost due to some businesses closing down or downsizing.

The EPF data on new registrants is not a surprise since firms are registering employees who they were not registering earlier. There are two policy changes that have led to a spurt in registrations. First, after 2015, the definition of those required to register their employees has changed. Earlier firms with more than 20 employees were required to register. This was changed to more than 10 employees. So, a large number of firms and their employees came under the EPF. These would all be new registrants but it does not mean new jobs.

Second, in the recent budgets a large number of concessions were announced for registration of new employees. A tax concession was announced. Further, the provident fund contribution of new employees was to be paid by the government. We need to know how many of the contract workers were registered as new employees due to these factors. So, those who were not counted earlier are now getting counted. This is not an increase in employment but simply a change of category.

The problem of under employment remains as before with massive automation in the economy and a slackening of investment.

III.4 Crisis in the Farming sector.

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 unorganized sectors 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 demonetization and the consequent shortage of cash. Where the rains have been good, prices have collapsed, like, in the case of dals, tomatoes and potatoes in 2017; the government is unable to implement the MSP scheme. However, costs have risen all around. Farmers were 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 unorganized sector went down and that meant that they bought less of the higher value agricultural produce. Prices, of dal, vegetables and fruits fell drastically after demonetization 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 demonetization.

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.

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

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

The first shock was the sudden demonetization 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 unorganized 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 pointed out and 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 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.

GST was introduced in the economy without proper planning since the government was too busy coping with the fall out of demonetization. This has created problems for businesses, even in the organized sectors. It further set back the unorganized 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 chargesystems. 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 it is levied. So, 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 and that is getting eroded. Finally, the third tier of government is left high and dry. There is no mention of the local bodies.  This runs counter to the idea of decentralization which is so essential for democracy in India.

  1. 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 have alluded to it by saying 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 smoke screen 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 based largely on projections from the past which is not correct 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 organized sectors of the economy and that too from select corporate firms. Thus, it represents only the organized sector growth at best. The data for the unorganized 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 organized and the unorganized sectors is used to project the growth of the latter. In effect it only gives the growth of the organized 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 unorganized sector during the period of demonetization or in the first few months of implementation of GST, the impact of these two on this sector will never be captured in the official data.

According to the private surveys done duringthe period of demonetization, 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 utilization in organized industry fell. Even before demonetization, capacity utilization was hovering at between 70 and 75% – a low figure. This impacted investment adversely as data suggests. In turn, this slows down the growth of the economy even after the notes shortage ends.

Even if the unorganised non-agriculture sector output for the year declined by 10% while the organized 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 unorganized sector from July 1, 2017. The organized 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 has become 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, data is inadequate 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, World Bank, IMF, ADB and Moodys 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 demonetization 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 utilization low. Will demand pick up with cut in interest rates? It is argued that the demand for white goods bought on loan (via EMI) can rise 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 lower EMI.

The investment climate has also been vitiated by the constant attack on businesses after demonetization. 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 demonetization as black money holders. This is being done to claim success of the failed demonetization. While some who deposited large sums of money indeed were laundering their black money but 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 per cent 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 package of expenditure on rural infrastructure. India escaped the recession and had a healthy rate of growth of 5% because of the large package of spending in rural areas based on a large increase in its fiscal deficit. The FRBM act was put on hold.

  1. Two Circles of Growth

The government has presented data on the growth in the automobilesector and travel by airto 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 unorganized sectors that have been hit hard by both demonetization and GST, as argued above. Even if one can assume that the organized sector is growing at the officially given rate of growth that cannot be assumed for the unorganized sector

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

The unorganized sectors are also hit hard by inflation since they are not indexed. Their wages tend to lag behind inflation so they lose purchasing power. But, inflation rates are low as per the official data.

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 privatization, these costs have been shooting up even for the marginal sections.

Should the decline of the unorganized sectors not have an impact on the organized 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 digitization to help the unorganized 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 had zero balance. RTI revealed that many bankers put a few rupees into these accounts out of their contingency funds. 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.

  • Conclusion

NDA in 2014 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 demonetization in November 2016 and introduction of GST in India in July 2017. Both of them led to a crisis in the economy but more particularly in the unorganized 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 the 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 demonetization 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, VYAPM 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 is pointed out above that the impact of the two shocks and the pro-business policies has been felt largely in the unorganized sections. This has created two separate circles of growth. The organized sector is growing at the expense of the unorganized sector. Consequently, the majority is getting marginalized and that is aggravating the already high inequalities in the country. This is effecting demand in the economy and leading to low capacity utilization 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 utilization 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 unorganized sectors has declined. Further, our inflation data does not take into account the rise in services prices 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 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 the more 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 criticized the government for not managing the advantage it got earlier to provide long term stability to the economy.

Employment is the big problem today. Educated youth is facing a crisis because they arenot getting the jobs appropriate to their skills. Artificial Intelligence, mechanization and grater protectionism in US are posing threats to employment generation. Farming continues to face a crisis and suicides are continuing. The Fiscal Deficit is lower under the pressure of international finance capital to the detriment of the poor and under employed. The Banking crisis of NPAs 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. So, unless bold steps are taken because the crisis is deeper than the government is willing to admit, the situation can only get worse and that will have political repercussions later on.The growing marginalization of the marginal is leading to growing disaffection.

 (Arun Kumar is India ‘s leading authority on black economy and has written, studied and lectured extensively on the subject for nearly four decades. He studied at Delhi University, Jawaharlal Nehru University (JNU) and Princeton University, USA, and taught economics at JNU for three decades till 2015.  His areas of interest include public finance, development economics, public policy and macroeconomics. Kumar has written widely on these subjects, both in the popular press and for academic journals. At present, he is the Malcolm S. Adiseshiah Chair Professor at the Institute of Social Sciences, New Delhi.

 Arun Kumar is currently Malcolm S. Adiseshiah Chair Professor, Institute of Social Sciences, Delhi and the author of ‘Indian Economy Since Independence: Persisting Colonial Disruption’.

This article is part of :  `Dismantling India: A four Year Report’..      John Dayal, Shabnam Hashmi and LeenaDabiru (Edited). Delhi: Media House.

Published with thanks and  author’s permission

His email ID :


  1. Farooque Chowdhury says:

    Thanks, Professor Arun Kumar, for the nice article. It’s illuminating. Thanks, Countercurrents, for giving an opportunity to read the useful article. The article takes away the disgusting experience of reading many trashes.

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  3. A good article Professor Arun Kumar. I do not think that the 2 shocks of Demonetization and GST were “not well thought out”. I think they were quite well thought out steps which were executed with specific intention of helping the Organized Sector to gobble up unorganized sector. And that intention is very well in progress. These steps were never meant to help working people of India in any case, but were as per the united demand of big capitalists of India.

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