Last week Prime Minister Narendra Modi joined the ongoing rhetoric debate on the state of the Indian economy with a strong defense of his government’s actions over the past three years. Among other things, his speech focused on the Indian economy, a project that had to be launched for a long time, but not for the rhetorical accusations made by both parties. If, indeed, there is a succinct way of summarizing the situation, suffice it to say that the economy has moved from a state of political paralysis (which identifies the Congress of the United Progressive Alliance or UPA) to the paralysis of investment. Both are cause for concern, but for totally different reasons. One was the result of a government that, for one reason or another, entered into a funk policy with disastrous consequences.
The other is the result of structural alterations – some, such as the spiral of bad debts with banks, are a legacy of the UPA regime and some that trigger policy changes, such as the deployment of tax goods and services and demonetization of high value, carried out during the last three years. Thus, while one is born of inaction, the other is largely a derivative of not anticipating or reacting in time to respond to the interruptions arising from hitting the reset button of the economy. It is important to understand this distinction. Otherwise, there is the risk of being overwhelmed by rhetorical claims and counter-claims about the economy; and misses the forest for the trees in some way. As such, the economy does not do as much as the opposition asserts, especially with almost all agencies predicting a rebound in economic growth, albeit marginal, in the subsequent quarters.
More importantly, macroeconomic stability has been restored. On the other hand, it certainly is not working, which some claim to be in the range of 8 to 8.5%, as claimed by spin spin physicians. This potential can only be exploited if levels of investment, which have fallen on worrying slopes, are recovering. But It’s easier to say it than do it. The legacy of delinquency or the described Arvind Subramanian, the chief economic adviser, since the problem of matched balance (since it affects the books of both companies and banks that extended loans) can not be solved from one day to next day. Parallel to the disturbances caused by structural measures such as GST, there is considerable suffering. As the old business structures built over seven decades are replaced, in some cases rather abruptly, the new systems are not ready to take over; in fact, the government made a mistake executing ideas.
It is the side effects of this transition that gives hope to critics and worries the government. In a column published in Mint last week, Indira Rajaraman, very briefly alluded to this phenomenon. According to her, the GST has completely revised the current risk-sharing mechanism, killing retail volumes. The solution, as Rajaraman, is not to return GST (as suggested by some political parties), but to correct the anomaly through adjustments (one of which has been accepted by the GST Council Friday putting instead of quarterly returns, rather than monthly). Likewise, the government’s anti-corruption initiatives are driving the transition to a more transparent transaction framework – precisely why the real estate company, which has flourished with unaccounted-for money, is in such a mess.
Here too the alternative framework has been slow to evolve and the government and other institutions like the Reserve Bank of India (RBI) are guilty of not pushing hard to walk the country through the required behavioral change. The Economist Intelligence Unit in a note published last week says a lot. “The slowdown in the growth of bank credit to the sector is due in part to the RBI initiatives and the efforts of the Bharatiya Janata Party to reduce corruption at the highest levels of business and government. slowness of the judicial system will make the transition to a financial system more focused on the extremely difficult market “and added:” We believe that a recovery of private investment depends on the government to inject additional capital for bank balances but also to companies to readjust their business models to the new financial system. “