That sinking feeling: 

That sinking feeling: 

Context

• Prime Minister Narendra Modi, in his Independence Day address, spoke triumphantly about how demonetization drove Rs. 3 lakh crore of unaccounted money into the banking system.

Result of the survey

• The Reserve Bank of India (RBI) is still counting old notes, and unaccounted money cases are ongoing. Thus, this number is at best a guesstimate, and cannot be taken seriously.
• The Survey states that, “A number of indicators — GDP, core GVA (GVA excluding agriculture and government), the Index of Industrial Production (IIP), credit, investment and capacity utilization point to a deceleration in real activity since the first quarter of 2016-17, and a further deceleration since the third quarter.”
• The Survey thus settles that demonetization ambushed a slowing economy.
• The Survey shows how demonetization devastated the informal sector, using two-wheeler sales as a proxy indicator.
• These dropped steeply for two quarters after demonetization. Construction, which absorbs migrant labour, was also badly hit.
• The Survey thus supports the Opposition’s argument that Finance Minister Arun Jaitley’s “record” allocation for MGNREGS merely reflects displaced migrant workers returning to villages and exercising their right to social insurance.
• Demonetization badly affected farmers’ incomes resulting in a loss of demand, lowering food prices.
• Consequently, inflation has hit lows below the RBI’s targeted band. Low inflation levels come at a human cost, farmers and those in the informal economy are losing their limited purchasing power.
• Additionally, hasty implementation of the Goods and Services Tax (GST) has paralyzed the informal manufacturing sector which lives on the edge, often saddled with debt.
• Protests in the textile hub of Surat reflect how GST is affecting medium, small and micro-scale enterprises.
• Formalization of the economy should not shut down businesses and extinguish livelihoods.
• Similarly, leather, another labour-intensive sector, is in trouble due to restrictions on cattle slaughter.
• Banks are not lending. In the year ending March 2017, credit growth plunged to 5.1%, lowest in 60 years.
• The private sector is not borrowing and the manufacturing sector is operating at a historically low capacity utilization of 70%. The latest IIP shows a contraction of 0.1% in June 2017.
• Neither credit nor investment will increase until the government addresses the “twin balance sheets” problem.
• Sadly, the Modi government’s early focus was on undoing the 2013 land acquisition law instead of addressing non-performing assets (NPAs).
• Bank lending is the lifeblood of the economy but government inaction has brought investments to a halt.
• In March 2014, NPAs were Rs. 1,73,800 crore. Today they are about Rs. 7,79,163 crore. Instead the government talks up foreign investment (only 2-3% of GDP) or aggressively lobbies the RBI to cut interest rates, which is unlikely to achieve much.
• As State governments find their fiscal space narrowing, private investment falters, and demand slows, we are entering a deflationary environment.
• Still there are fiscal policy measures that the Union government can deploy.
• It can belatedly share the benefits of low oil prices by cutting excise duties on petroleum to give people and businesses more spending power, boosting demand.

Job destruction

• The Centre for Monitoring Indian Economy reports that 1.5 million jobs were lost during January-April 2017.
• Ignoring his own promise of creating two crore jobs a year, Mr. Modi exhorted jobseekers to become job creators.
• But international experience, in developed OECD (Organisation for Economic Co-operation and Development) countries, shows self-employment is only about 15% of total employment.
• Mr. Modi extolled the job-creating impact of the MUDRA loan scheme.
• In contrast, MUDRA’s CEO is on record saying that it cannot be verified that the agency has created large numbers of jobs.
• Another misguided Union minister recently triumphed about “job creation” under MGNREGS — not realizing that it is a social protection scheme that people turn to when they have no alternative employment and not exactly a reason for cheer.
• Overall, the real state of India’s economy is deeply worrying. The latest RBI surveys of consumer confidence, industrial outlook, and professional forecasters point to pessimism on all fronts except inflation management.
• Mr. Modi spoke of how a train slows down as it changes tracks. Unfortunately, Economic Survey II’s numbers suggest that the economy has actually been derailed.