Nikkei Asian Review: NaMo loses his luster as Indian economy stutters

by Guest Mon Oct 23, 2017 3:47 am

The garment makers of New Delhi, the carpet weavers of Varanasi, the village barbers in Haryana and other enterprises at the bottom of India's business food chain are in trouble. Providers of space and power are demanding that their bills be paid. Yet these vulnerable enterprises have little cash coming in. Customer orders have dried up; there is virtually no demand. Every month more of them go under.

It has been nearly a year since India launched a bold experiment with de-monetization, voiding 86% of all bank notes. What was initially hailed as a bold effort to wring black money out of the economy has come to be widely considered a disaster, both in conception and execution. As if that failed experiment was not enough to deal a near-fatal blow to the weakest businesses and households, the introduction of a new goods and services tax (GST) has added to their difficulties.

Such ostensible reform measures are among the primary reasons why India's growth in gross domestic product for the April to June period was a mere 5.7%. Under an earlier methodology, replaced by the government soon after Narendra Modi became prime minister in May 2014, the number would have been closer to 3.5%. The second quarter was the sixth consecutive quarter in which growth has decelerated.

India's economic woes are symptoms of long festering problems and the policy failures of successive governments. But they come at a time when the rest of the world seems set on a healthier trajectory. India is falling behind when it can ill afford to do so, given that it needs to create a million jobs a month because of its youthful population but has created fewer than 1 million every year. China, by contrast, created 8.55 million jobs in the first half of this year alone.

Suddenly Mr Modi's government - which came to power with a strong mandate - no longer appears omnipotent. This is a sharp reversal from just a few months ago, when the voters of Uttar Pradesh, the country's largest state, gave Modi and his Bharatiya Janata Party an overwhelming victory over the opposition. Now it is as if the emperor has no clothes. Criticism of the administration is widespread among the opposition, and even among BJP supporters. Economic uncertainty is now being aggravated by political uncertainty...

Part of the problem is related to expectations. GST was meant to be a simplified, unified tax regime replacing a patchwork of central, state and local sales taxes. It promised to make India a single economic entity rather than an agglomeration of states, each with its own tax policies. But it has not worked out that way. There are five different rates, with tortuous distinctions involving vastly different tax consequences for similar items.

Toll stations still exist at state borders, manned by collectors who sometimes lack official status and decline to give out official receipts. Even the largest companies have no clarity about the details of the new taxes, but they at least have the personnel to grapple with the complexities. Smaller businesses have had to hire staff, adding to their cost burdens.
GST was not expected to add to inflationary pressures in the economy, but it appears that in practice it is doing so.

https://asia.nikkei.com/Politics-Economy/Policy-Politics/Modi-loses-his-luster-as-economy-stutters