There is sudden panic in the media and political circles about the Indian Economy. Private investment is not picking up in India. This, is the crux of the problem and this needs to be resolved to revive the Indian Economy.
The Indian 24×7 news channels, especially the Indian English news channels have gone into a frenzy about the gloom in the Indian Economy, ever since the growth rate for the 1st quarter of 2017-2018 have been published. They are amply supported by some ex FMs of India who through their columns have magnified the problems in the Indian Economy to scary proportions.
Demonetization and GST, two of the reforms of the present Union government of India, have suddenly become the antagonists of the economic story as per the Indian Media. A few months ago, these two reforms were the protagonists of the Indian Government as per the same media. So how did the protagonists become the antagonists within a span of months.
This is the result of "Lazy Economics" a term that was put forward by Surjit Bhalla a well known Economist, who is now a part of the new Economic Advisory Council (EAC) constituted by Prime Minister Modi in September 2017. Yes, this indeed is nothing but "Lazy Economics", cause even after hours of debates and columns after columns, none of these celebrity journalists or ex FMs have been able to substantiate with facts, the "Huge" impact of demonetization and GST on the Indian Economy.
Anyone who has been observing the Indian Economy even casually will notice that the GDP figure has been dipping for about 6 quarters now, which means it's been dipping even for 3 quarters before demonetization.As for GST, the irony is that, it wasn't even implemented in the 1st quarter of this FY 2017-2018, for which, this so called "dismal" GDP growth figure of 5.7% was published and triggered this frenzy about the gloom in the Indian Economy. This is proof enough of how ignorant these celebrity journalists and how "Consciously ignorant" the ex-FMs are about the effects of demonetization and GST on the Indian Economy.
The lack of jobs growth or jobs creation is another indicator that is screamed out loud in these "Gloomy Economy" debates and columns. Even a lazy glance through Indian Economy over the past 6 years will show that jobs creation in India was low even when the GDP growth figure was above 7%.
This is where I want people to notice the crux of the problem in the Indian Economy, which is Private Investment especially MSME Investment. Observing the Indian Economy over the past 6 years will reveal that Private Investment especially MSME Investment dropped to sharply by 2013 and hasn't picked up much since then. The other indicator that explains this drop and no-growth in private investment is the figure on lending growth in India.Lending to MSMEs is at dismal levels, almost at 1992 levels. So what does this tell us and what is the problem in the Indian Economy and can it be revived and if yes how.
The reality is that most of the private sector, especially the MSME sector in India are dependent on banks, nbfc and other lending institutions for funds. If lending isn't going to grow meaningfully, then it just implies that Private Investment especially MSME Investment isn't going to grow meaningfully. Unless MSME segment grows, jobs are not going to be created in India. Public spending can never be a substitute for private investment especially in a country like India whose growth over the past 2 decades has been primarily driven by private investment. So for robust and sustained growth, private investment has to grow meaningfully in India and for this lending to MSMEs has to grow significantly from present levels. So what has lead to this tremendous pessimism in lending. The NPAs and resulting caution and suspicion of banks about the private sector especially the MSME sector has caused this. I must honestly admit that I am not an authority in banking, but from what I know, the banks have more than one means of restructuring the NPAs of MSMEs and infrastructure companies into long term diminishing loans. This along with a solid backing of the frontline branch managers by the government, the kind of backing this union government has given to the defence establishment including the frontline soldiers needs to be given to the bankers. This I feel will revive lending significantly and I am convinced that unless lending to MSMEs revives in India, Private Investment isn't going to grow significantly. The MUDRA scheme is an excellent scheme, however the implementation of this has been far from ideal. This scheme is supposed to benefit the the tiny Establishments and very small entrepreneurs who did not have access to traditional bank lending. However, bankers already living under fear of past NPAs, and constantly under fear of investigative agencies are not lending to the actual target of this MUDRA scheme. So the implementation of the MUDRA scheme too needs to be given a turbo push. These above-mentioned suggestions will definitely push up lending which in turn will revive the private investment and which in turn will revitalize the jobs creation and Economy growth.
Now, would demonetization and GST have no impact on the Indian Economy. No, demonetization and GST according to me, are great structural reforms of the Indian Economy. So what do we mean by structual reforms. The Indian MSME segment and as a result the Indian Economy was largely an informal Economy. There have been several eatimates, but it can be safely said that more than 70% of the Indian MSME segment has been informal, which means that it was running on cash and without bills. That explains the more than necessary currency in the system before demonetization. So demonetization and GST have increased the cost and risk of being in the informal Economy and thereby forcing the MSME sector to become a part of the formal economy. This has indeed hit the profitability of the MSME sector which is already grappling with lack of funds due to decrease or lack of lending. Based on a math by Surjit Bhalla, he said that a company in India is totally taxed roughly ₹70.00 for every ₹100.00 he makes as against ₹40.00 in Bangladesh for every₹100.00 an entrepreneur in Bangladesh makes. So along with structural reforms like the demonetization and GST that push the MSMEs from the informal to the formal economy, the government should also needs to rationalize total taxation of MSMEs in such a way that they are taxed lesser than MSMEs in competing nations.
So turbo push lending to MSMEs and infrastructure companies and also turbo push implementation of the MUDRA scheme, along with this rationalize taxation of MSMEs. This I am convinced will turbo push the Indian Economy and jobs in India. The present Union government of India has the will and the capability to do what needs to done to revitalize the economy.The time is ripe and I look forward to their implementation now.
Tax rates generally affects our economy. Some of the people believe that a reduction in the tax rate will lead to increased economic growth and prosperity while others claim that if tax rates are reduced, then almost all of the benefits will go to the rich.
IMF forecasts the growth of Indian economy in context of the recent structural reforms undertaken by the Govt. of India..