Citizenship mayhem is perfect smokescreen for government to hide real economic issues, but the clock is ticking

  • The severe growth slump that has gripped the country’s economy has even surprised the International Monetary Fund

  • IMF’s last forecast for India was 6.1 percent growth for India in 2019

  • The two other big negatives for the economy are the absence of private investments and lack of critical, long-pending reforms in land and labour segments, coupled with a major loss of consumer confidence

Till a few years ago, every international economic agency used to be upbeat on India as the next economic power among emerging economies. In fact, both multinational agencies and private forecasters were competing with each other to present the most optimistic picture on the India-growth story.

That isn’t the case any longer.

The severe growth slump that has gripped the country’s economy has even surprised the International Monetary Fund (IMF).  In all likelihood, the fund may sharply cut its growth projections for the country soon, said Gita Gopinath, IMF’s Chief economist at the India Economic Conclave organised by Times Network. “It is likely to be a significant downward revision for India,” Gopinath said at the event.

IMF’s last forecast for India was 6.1 percent growth for India in 2019.

 Citizenship mayhem is perfect smokescreen for government to hide real economic issues, but the clock is ticking

File image of Gita Gopinath. Reuters

If IMF’s revised predictions go below 5 percent for the full year, it will be joining a slew of other forecasters who have dished out pessimistic predictions for India at below 5 percent full-year growth. This includes the Reserve Bank of India (RBI) which revised its growth forecast for 2019-20 to five percent from 6.1 percent earlier, recently. Rating agency Moody’s has slashed the growth forecast to 4.9 percent. The same is the case with Japanese brokerage firm, Nomura.

Economy in a tailspin

India’s economic indicators have been flashing distress signals for a while now. Not many in the government paid attention though. The second-quarter GDP numbers were even worse than the first quarter at 4.5 percent, led by a broad-based decline across sectors. Even the third quarter that began in October has started on a weak note.

In October, the factory output contracted for the third consecutive quarter at 3.8 percent compared with a contraction of 4.3 percent in September and 1.4 percent in August.

The manufacturing segment contracted by 2.1 percent, electricity growth contracted by a massive 12.2 percent, the lowest in seven-and-half years, growth in capital goods segment that reflects the investment activity on the ground plunged by negative 21.9 percent (lowest growth in over six years) and infra/construction sector growth at negative 9.2 percent, again, the lowest in six and half years. Thus, high-frequency economic data in recent quarters indicate that the Indian economy has been losing steam rapidly.

What is causing the economic slowdown?

There are both long-term and short-term reasons that can be cited for the current downturn. Even before the Narendra Modi-government came to power at the centre, a slowing global economy and international trade were already taking a toll on the economy. But, some of the hasty and unprepared actions of the government added pace to the slowing economy. Undoubtedly, the 2016 demonetisation of high value notes impacted the cash-dominated informal economy hard, breaking the supply chains and forcing many small businesses to shut shop. The botched implementation of the Goods and Services Tax (GST) further caused miseries to small businesses.

A large part of the economy hasn’t recovered yet from these shocks. The two other big negatives for the economy are the absence of private investments and lack of critical, long-pending reforms in land and labour segments, coupled with a major loss of consumer confidence. With private investors remaining on the sidelines, the economy has been largely riding on government spending.

The fact that some of the most hyped initiatives of the Modi-government—ease of doing business and Make in India initiative—have not shown the desired effect on the ground is evident from the poor manufacturing sector performance.

Clearly, the Modi government's economic advisors failed to flag the onslaught of a deep economic slowdown. It was only in mid-2019 that the government began announcing steps to counter the slowdown. But none of it has worked out enough to rejuvenate the economy. The government has not yet come out with a comprehensive roadmap to take the economy back to the growth path, especially to revive demand and address long-pending reforms in the acquisition of land and labour.

Is Citizenship Bill a smokescreen?

Post-the abrogation of Article 370 and Supreme Court ruling on Ayodhya Ram temple, the general expectation is that the BJP-government will now focus on repairing a crisis-ridden economy. But the nationwide student protests over the Citizenship Amendment Act, some of which have since turned violent pan-India, has yet again created a major diversion from the core economic issues. Economic concerns thus have taken a backseat.

A likely downgrade by the IMF, followed by a series of similar forecasts, will underscore India’s growth slowdown and increase the burden on the government. The government lived in denial about the deep slowdown in the economy too long before it finally acknowledged the problem, thereby delaying resolution.

The rising unemployment and rural distress have mounted pressure on the government with likely political ramifications. One question at this stage is whether the government is deliberately using the Citizenship Amendment Act (CAA) controversy to hide economic issues. The CAA protests have replaced stories of economic distress in national media since then.

This question has high relevance at this stage, especially given that neither Prime Minister Narendra Modi, nor his ministers are even talking about the economic crisis/solutions ever since the CAA controversy broke out. Gita Gopinath’s comment should serve as a big warning to the Narendra Modi government to get its focus back on economy. The clock is ticking.

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Updated Date: Dec 18, 2019 16:06:45 IST