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The Real State of The Economy 2017
The Real State of The Economy 2017
THE
REAL
STATE OF THE ECONOMY
2017
Unfortunately, the answer to this question is marked by There can be endless debates over whether the GDP
significant pessimism. ar, There are nearly 10 lakh numbers conform to lived reality of economic growth.
youth looking for a job every month in India. Amid There can be intense squabbling over real and nominal
such a staggering need and a tall promise, there were growth numbers or monetary policy decisions. There
less than 1.5 lakh new jobs created in all of FY2016, as can be loud chest thumping over Indias status as one of
per the latest data available from the Labour Bureau. the fastest growing economies in the world. Behind the
What is even more depressing is that the pace of slogans of Make in India, StartUp India, Skill India,
creation of new jobs is not increasing but actually Digital India and so on lie the stark reality two out of
declining. three Indians are either abysmally poor or jobless or
both. It is time the government woke up to the
Fig: New Jobs Created (in Lakhs/Year) frustration that is building among Indias youth and is
.
manifesting itself partly in various agitations around the
15 country.
10
Instead of addressing this issue, Prime Minister Modi
5 chose to launch a nuclear first strike on the Indian
0 economy through demonetisation. A slowly recovering
2010 2011 2012 2013 2014 2015 2016 economy found itself stunned when the Modi
government jammed the brakes on Indias growth. In
Source: Quarterly report on changes in terms of the impact of demonetisation, a range of
employment, Ministry of Labour experts have produced an array of estimates about the
extent of the slow down: from 1% to more than 2%,
As the numbers show, there has been an alarming over six months to over five years. Every percentage
decline in job creation. It has dropped by nearly 90% point drop in Gross Domestic Point (GDP) growth costs
from roughly 11 lakh new jobs in 2010 to less than 1.5 the country 1.5 lakhs of crores of rupees.
lakh new jobs in 2016. According to the Labour
Bureaus fifth employment-unemployment survey, But behind these numbers lies the terrible human cost
official unemployment figures rose from 12.9% in 2014 the jobs not created, the opportunities to climb out of
to 13.2% in 2016. Whichever way one looks at official poverty lost, and the dashed aspirations of Indias
data, it is unambiguously clear that India is headed for a youth. It is this harsh reality that motivated the creation
demographic disaster if the current ominous trend is not of this report. Our aim is to shine a light on the areas
reversed soon. It is through this prism, that the state of where the government has faltered in its management of
todays economy in India must be viewed. While the the economy so that it can correct course and put India
back on a positive growth trajectory once again.
THE REAL STATE OF THE ECONOMY: 2017
Chapter 1
Growing Gaps
Jobs, Investment, Infrastructure
India is a youthful nation with a median age of 27.6 years. Our working age Post-election: Abortive drives: fruitless attempts at job creation
population will increase from approximately 761 million to 869 million dur-
ing 20112020. If more of our young people start working and earning, our Creating job opportunities to match the availability of labour is a huge chal-
economy will take off, and we will encash a demographic dividend. But lenge. At one end, there are issues of employability, as a significant propor-
for that to become a reality, India needs to create large numbers of jobs for tion of the people entering the job market are not adequately skilled by our
the 12.8 million youth who enter the work force every year. Recent data education system. On the other end, the country is not able to create those
indicate that Indias demographic dividend will probably last only one many opportunities to absorb the available labour.
generation. Therefore it is imperative that we do not miss this crucial win-
dow of opportunity. Governments approach: The governments approach to create jobs
touched both ends. To solve the issue of employability, the government re-
Prime Minister Narendra Modi led the Bharatiya Janata Party to power by designed the then skill development program and launched the Skill India
promising Indias voters that he would spark unprecedented economic program. To create jobs, government launched the Make in India program,
growth and catapult India from the ranks of emerging economies to those of aimed at encouraging big-ticket investments and the Startup India program,
developed nations. Foremost among his promises were the creation of new aimed at aiding entrepreneurship. For providing avenues of self-
jobs. employment the government introduced the Standup India scheme and the
Mudra loan scheme. However, owing to numerous issues including faulty
However, the creation of new jobs is contingent on new investments. Invest- design and poor implementation, by and large, these attempts have been
ments can either be public or private. Public investment, particularly invest- unsuccessful at job creation.
ment in infrastructure can create a huge number of jobs. But these invest-
ments can be increased significantly only if the government generates addi- Skill India: The government generated the expectation through statements
tional funds. On the other side, to encourage private investment the govern- and advertisements in the media that the National Skill Development Corpo-
ment needs to create the right investment climate by clearing the policy hur- ration (NSDC) set up by the earlier UPA government would be transformed
dles and by providing the right incentives. An important element to consider into an exceptional job creator, under a newly launched programme named
is the sector that attracts investments, because for the same amount of invest- Skill India. This initiative was designed to impart vocational training. The
ments, different sectors create different number of jobs. So, naturally to cre- projection was for 150 million jobs originating from NSDC by 2022, imply-
ate more jobs the government should focus on attracting new investments in ing a target of 2 crore jobs per annum from NSDC alone. However, this ini-
the job intensive sectors. tiative has not worked out and the NSDC CEO and COO both resigned a
month before Minister Rajiv Pratap Rudy admitted in a speech to CII that
At the midway point of Modis term, none of this has transpired. India ap- this thrust had failed. The travails of this scheme are described in detail in
pears to be caught in a progressive downward jobs spiral, investments ap- the chapter on Social Sector.
pear to be unresponsive to the call to Make in India, and infrastructure is
improving far too slowly to have a multiplier effect. In this stressed environ- Make in India: In his first speech from the Red Fort on Independence day,
ment, the governments sudden move to demonetise 86% of outstanding Modi had said: Today, if we want to give more and more employment op-
Indian currency on 8th November, 2016, appears to have further impacted portunities to the youth, then we will have to promote the manufacturing
the possibilities of economic revival. The reality is that we seem to be crash- sector. At that point he was also building a case for a Land Acquisition Bill
ing from high hopes of a demographic dividend towards a demographic to help private sector groups acquire farm land without adequate safeguards
disaster. for farmers, but he made a link between manufacturing and jobs. Soon after,
on 25 September, 2014, the government announced the Make in India
1.1 2013-14 AND NOW: THE CONTRAST IN JOBS policy. This would encourage foreign companies to set up manufacturing
operations in India and these would employ millions of young Indians mov-
Grandiose Promises ing from farm to factory.
In the 2014 elections the BJP made grandiose promises about how it would The Make in India program was launched in September 2015, but an exami-
create jobs. In November 2013, the BJP prime ministerial candidate, Naren- nation of FDI inflows since the announcement suggests that the services
dra Modi promised one crore jobs if brought to power during an election sector is still the recipient of the highest proportion of FDI (around 17%),
rally in Agra. By 2nd March 2014, the scale of the promise grew to include while employment-intensive manufacturing sectors such as automobiles lag
jobs for each and every youngster: If our nation has to progress, and if we far behind. The aggregate FDI inflow over three years does not appear to be
wish to add wings to the aspirations of our youth, we need to create enough headed even close to the $500 billion promised by the massive deals signed
jobs to employ each and every youngster joining the work force. by the government.
1
THE REAL STATE OF THE ECONOMY: 2017
2
THE REAL STATE OF THE ECONOMY: 2017
It is important to note that the jobs problem runs deeper than just a slow- This is having an adverse impact on wages paid to labour and on employ-
down. The Labour Bureau reported creation of 11 lakhs jobs in 2009, 9 lakhs ment, leading to a sharp slowdown in the manufacturing businesses sub-
in 2011, 4.19 lakhs in 2013, and 1.35 lakhs jobs in 2015. Clearly, there is a contracted by the corporate sector. These are mostly the medium and small
downward jobs spiral in the economy, created by factors that are more com- enterprises, which are drivers of employment growth.
plicated than a simple cyclical slowdown. Instead of announcing big-bang
projections running into over a hundred times the current job creation figure, The impact of the slowdown in the corporate sector on employment can be
this structural problem requires a well-thought through, concerted, perhaps inferred from companies disclosure about their expenses on wages. Wages
consensus-driven job creation policy but no such vision has
been shared by the government.
Fig 1.3: Sales Growth of Corporate India- Nominal and Real (%)
Although not a job in the proper sense, the MGNREGS
scheme, which provided guaranteed work to the jobless in the 25
villages, is also not working. According to government fig-
20
ures, in the first 50 days of the financial year 2015-16, 2.27
crores people demanded work under the job guarantee 15
scheme but only 1.1 crores actually got work. More than half
10
the people seeking work were turned back. The reason cited
by state governments is that central funds are not being re- 5
leased for payments. Thus, even the MNREGS scheme de-
0
signed to mitigate the impact of rural unemployment is not
functioning as it should. -5
-10
Prime Minister Modis statements on jobs have become far
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
13-14
14-15
15-16
16-17(H1)
more circumspect and sober. In a much-publicized interview
last July to the Times Now news channel, Modi had said that
jobs need to be created keeping in mind the aspirations of the Sales Sales (inflation adjusted)
middle class. "The middle class has its aspirations. We have Source: CMIE Prowess
to create jobs. How will job creation happen? Till I invest in
the development of infrastructure, there will be no job crea-
tion". In other words, he no longer claims to have a panacea.
Fig 1.4: Wage Growth of Corporate India- Nominal and Real (%)
A huge blow to jobs arrived when Larsen & Toubro, Indias
venerable engineering giant and stock market superstar, laid 30
off 14,000 employees over a period of six months till Septem-
ber 2016. If other Indian large enterprises undertake similar
20
layoffs, the job loss situation will worsen substantially.
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
13-14
14-15
15-16
3
THE REAL STATE OF THE ECONOMY: 2017
increase year-on-year in nominal terms when either the wage rate increases downsizing phase. This downsizing seems to have become severe during the
and / or when employment increases, and normally both. It is therefore nor- three years 2014-15, 2015-16 and 2016-17. This has implications on employ-
mal to expect the wage bill of the corporate sector rise at a rate that is higher ment opportunities within the corporate sector. It also has ramifications on
than inflation in consumer prices. the rest of the economy.
The CMIE Prowess database shows that the overall wage bill of Indian cor- First, labour will be forced to look for jobs in less paying and less efficient
porates has been constantly decelerating. This slowdown worsened during sectors such as small scale units and even agriculture. The second implica-
2014-15 and 2015-16. Corporate wages grew by 8.9 per cent and 5.9 per tion is the downsizing of the corporate sector. This makes the first factor
cent, respectively, during these years. During these years, inflation as meas- worse. As the corporate sector downsizes itself, it also provides less business
ured by the Consumer Price Index (CPI) was 5.8 per cent and 4.9 per cent, to outsourced manufacturing units. This reduces employment opportunities
respectively. Therefore, real wages grew by only 2.9 per cent and 0.9 per in these smaller units as well.
cent, respectively.
Impact of Demonetisation on Small Companies
This is substantially lower than the 5-10 per cent real inflation-adjusted
growth seen during the 2000s, lower than the close-to-five per cent growth Smaller companies unable to cover interest costs
rates seen since 2010-11.
It is imperative that small companies become big because it is their growth
This slowing growth of the real wage bill of corporates indicates a lower that provides the best employment opportunities in the country. However,
potential for fresh employment in the corporate sector. times of a business downturn make it difficult for
these companies to survive.
Fig 1.5: Growth in Net Fixed Assets of Corporate India (%!! Usually, an interest cover of 2 or more is consid-
ered to be comfortable. A negative interest cover
shows that the company was not able to meet its
30
interest payment obligations after paying for opera-
tional costs.
20
During 2014-15 and 2015-16, the situation has
10 become worse compared to the preceding years.
From 2009-10 till 2013-14, the last three deciles
0 showed a negative interest cover. However, in
2014-15 and 2015-16, interest cover has been nega-
-10 tive in the last four deciles. Evidently, the stress at
the bottom of the corporate pyramid has worsened
during the last two years. It has spread to more
-20 companies.
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
13-14
14-15
15-16
16-17(H1)
India annually sees an addition of 12.8 million to the workforce. When total
Financial statements of listed companies as of September 2016, show an 8.6
job creation is an abysmal 1.35 lakhs, obviously the remaining go into sur-
per cent fall in net fixed assets. This is an ominous sign of the difficult times
vival mode. They join hundreds of millions of co-sufferers in low paying
the country faces in the near future. The fall in net fixed assets implies that
companies did not
invest sufficiently
during the year
ended September
2016 to offset even
the depreciation
suffered on the exist-
ing stock of assets.
4
THE REAL STATE OF THE ECONOMY: 2017
informal sector jobs, migrate to cities, live in horrendous conditions, face April 2016. The estimated population (of 15 years of age
sickness and disability or work in fields on negligible-nutrition diets. or more) during this period was 946 million. As a result, the labour participa-
tion rate (LPR) works out to 46.8 per cent.
Sectors like agriculture, fishing, and the voluminous informal economy, that
fundamentally thrive on cash, came to a grounding halt when Modi an- During May-August 2016, the labour force increased to 448 million and the
nounced the demonetisation. Many businesses and livelihoods went under LPR increased to 47 per cent.
completely. Moreover, there is a huge economic cost when millions of peo-
ple stand in line for long hours to exchange or deposit canceled banknotes. As fresh graduates came into the labour markets during the summer of 2016
This is crucial time taken away from earning a wage or doing business. Peo- and as the kharif crop season began soon thereafter, the labour markets
ple in the above category either lost jobs or simply stopped working because swelled. The increase in the labour force was larger than the increase in
no pay was available. Chains of communication, command and credit lines population during the same period. Consequently, the LPR increased from
that have dealt with informal working relationships for decades collapsed. 46.8% to 47%.
Within 16 days of the demonetisation, The Financial Express quoted the PTI
as saying that 400,000 people had lost their livelihood already. During September-December 2016, the labour force contracted. The labour
force fell to 445.5 million during September-December 2016 from 448 mil-
The total labour force in India was estimated at 443 million during January- lion in the May-August 2016 period. The labour participation rate fell to
46.4%. Of the three waves of the survey conducted during 2016, the
LPR was the lowest during the September-December 2016.
Fig 1.6: Labour Force (in Millions)
A contraction in the labour force during this period is counter-
intuitive because this is when the kharif crop is harvested and is the
450 season of marriages and festivals across the country. Therefore the
labour force should expand during this season in response to the
greater demand for labour in the production and distribution of
goods and services.
447 The fall in the labour force is due to the demonetisation shock. Not
only did the demonetisation result in labour being rendered unem-
ployed, it also shunted people out of the labour force itself. As on-
ground reports from the media have indicated, people who lost
jobs post-demonetisation moved back to their villages. With no
444 hope of getting jobs in their villages, they reported their status as
unemployed and not as looking for a job. Thus, they were not
counted in the measurement of the unemployment rate. They have
simply dropped out of the job market.
441 The number of persons out of the labour force increased from 505
million during May-August 2016 to 514 million during September-
Jan - Apr 2016 May - Aug 2016 Sep - Dec 2016 December 2016. This sharp increase in the number of persons out
of the labour force is obviously not an increase in the population. It
Source: Labour Bureau is neither a sudden increase in the retired or aged. This is a reflec-
tion of the people who have dropped out of the labour markets
during this period. Clearly the demonetisation has devastated In-
Fig 1.7: Labour Participation Rate (%) dias labour market leaving workers discouraged and dispirited,
leading to their dropping out of the labour market.
Migrant labour is easily laid off. Their jobs depend upon the de-
46.4
mand for labour that can fluctuate almost every day. Migrant la-
bour survives on the expectation of some job on an on-off basis
46.2 during their stay in the place of work. If this expectation falls, they
return back to their villages because they cannot survive in the
towns without an expectation of jobs. This labour force migrates
46.0 back to the villages and temporarily stop working till the demand
Jan - Apr 2016 May - Aug 2016 Sep - Dec 2016 picks up again and expectations of jobs are revived.
One evidence of the hit on migrant labour is that the labour force
Source: Labour Bureau
5
THE REAL STATE OF THE ECONOMY: 2017
India witnessed the fastest growth in gross fixed capital formation during the
1.2 INVESTMENTS
years 2003-04 through 2007-08. This is the only period when India wit-
nessed double-digit growth in the gross fixed capital formation for five con-
Deals and Expectations
secutive years.
Narendra Modi built up expectations that he would provide a substantial This period of exceptionally rapid growth in investments was interrupted by
boost to the Indian economy if he were elected Prime Minister. This was the global financial crisis in late 2008. But, the country recovered quickly to
based on the perception that he had attracted substantial investments to Gu- regain a large part of the lost momentum.
jarat during his long stint as Chief Minister. While critics argue that the bulk
of these investments pre-dated his tenure, the overall consensus manufac- After a long and aggressive phase of expansion, the growth in capital forma-
tured was that Prime Minister Modi would attract investments and create the tion slowed down from 2012-13. Yet, the GFCF continued to expand at 3-5
momentum for a period of strong economic growth. per cent per annum till 2015-16.
There have been two strands to the governments efforts to increase invest- It is imperative that the investment climate be improved dramatically to en-
ments. First, Prime Minister Modi on his visits abroad, and the government sure that the country provides sufficient jobs to the large and growing labour
at various investment summits organized in India, have signed massive deals force. This is to ensure that the country is able to provide a reasonable qual-
6
THE REAL STATE OF THE ECONOMY: 2017
Fig 1.8: Growth in Gross Fixed Capital Formation (%) The investment momentum stalled because of the
(at 2011-12 Market Prices)
need to address internal concerns arising out of the rapid growth in invest-
30 ment and because of externalities concerning fuel costs and availability.
The Supreme Court ban on iron ore mining, environmental costs of select
25 large investment projects, complications arising out of global fuel prices
and their impact on new investments in India and the serious popular resis-
20
tance to acquisition of land for industrialisation stalled the investment jug-
15 gernaut.
10 While many of the problems that assailed new investment projects or the
implementation of many in the pipeline during 2011-12 were addressed
5
during 2013 and 2014, the investment ratio has continued to slip. This is
0 very worrisome.
-5 The investment ratio is estimated at 29.1 per cent for 2016-17. But, in the
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
second quarter of fiscal 2016-17, that ended in September 2016 the invest-
ment ratio was already a shade below 29.
Source: CSO, Ministry of Statistics and Programme Implementation
The investment ratio had slipped 201 basis points in three years from its
Fig 1.9: Quarterly Growth in Gross Fixed Capital Formation (%) peak of 34.3 per cent in 2011-12 to 32.3 per cent in 2014-15. However, the
(at 2011-12 Market Prices) drop is much sharper in the following two years. The investment ratio has
dropped 322 basis points in just two years - 2015-16 and 2016-17. Thus,
16 the fall in the investment ratio has worsened by 50 per cent to 150 basis
points per annum during the first two years of the current government com-
12 pared to the worst period of the previous government, when it was 100
basis points per annum.
8
The need to revert back to the healthy investment ratio that prevailed
4 through much of the UPA regime cannot be over-emphasized. In fact,
there is a need to surpass those levels.
0
CMIEs CapEx database helps understand the current and prospective
-4 trends in investments in India. The CapEx database provides a detailed
view of the flow of new investment proposals and their conversion into
-8 new capacities over time. It also provides a view of projects being stalled
Sep-12
Dec-12
Sep-13
Dec-13
Sep-14
Dec-14
Sep-15
Dec-15
Sep-16
Mar-13
Mar-14
Mar-15
Mar-16
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
and this dimension provides us a glimpse of the possible reasons for the
investment cycle remaining low. We first study new investment proposals,
Source: CSO, Ministry of Statistics and Programme Implementation then the completion of projects and finally the problem of projects being
stalled midway through investments.
ity of life to its population and meet the hopes of a young and aspirational
India. New Investment Proposals Hit by Demonetisation
However, 2016-17 appears to be a washout with capital formation shrinking. New investment proposals add to the pipeline of investments on hand which
In fact, gross fixed capital formation has declined in each of three quarters eventually lead to new productive capacity, economic growth and new jobs.
of 2016 compared to the corresponding quarter of 2015. And, the rate of fall Many investment proposals fail to convert into new capacity for a variety of
has been increasing. It dropped 1.9% in the quarter January-March 2016, reasons. Some attrition of investment proposals is inevitable since projects
then it fell by 3.1% in the quarter April-June 2016 and slid further down by are vulnerable to economic cycles, changes in commodity prices and to the
5.6% in the quarter of July-September 2016. legal and regulatory environment. As a result, to ensure that a sufficient num-
ber of projects reach fruition, it is imperative that there is always a steady
This implies reduced jobs and lower growth for the future. Moreover, the flow of new investment proposals.
trend seems to suggest that India is allocating lesser resources for its future
growth. This is clear from the investment ratio discussed below: The rate of new investment proposals is a reflection of the business cycle
itself. A supportive business environment enthuses entrepreneurs to consider
Declining Investment Ratio new investments. An adverse business environment reduces this enthusiasm
and therefore the rate of flow of new investment proposals.
Investment ratio is the proportion of GDP that is set aside for investments. It
is income that is not consumed and instead is invested to build capacities for The trend in new investment proposals shows that these peaked in 2008-09
future GDP growth. to Rs.22 lakh crore. Then, they dropped initially to Rs.16 lakh crore for two
years and then to Rs.9.8 lakh crore in 2011-12. In the following two years,
The investment ratio increased rapidly during UPA I and continued to re- 2012-13 and 2013-14, new investments were down to Rs.5.1 lakh crore and
main high in spite of the 2008 global financial crisis. In fact, the ratio Rs.5.9 lakh crore.
peaked in 2011-12. The recovery in the investment ratio in 2010-11 and its
further rise in 2011-12 showed the resilience of the investment momentum The declining trend of new investments was arrested in 2014-15, when new
that originated in 2004. investments increased smartly to Rs.10.3 lakh crore. But, this increase was
short-lived. New investment proposals dropped to Rs.8 lakh crore in 2015-
7
THE REAL STATE OF THE ECONOMY: 2017
During the first three quarters of 2016-17, projects worth Rs.1.8 lakh crore
Rs.4.8 lakh crore worth of new projects were observed during the first three
were stalled.
quarters of 2016-17. By a simple extrapolation, we could expect the year to
end with Rs.6.4 lakh crore of new project announcements during 2016-17.
Projects whose implementation is stalled account for about 12 per cent of
This would be lower than the investment proposals seen in the past two
the total stock of projects under implementation. This ratio has risen sharply
years.
in the past three years and it continues to remain very high.
However, even this is unlikely to happen. CMIE observes that demonetisa-
Adverse business conditions main cause for projects getting stalled
tion has hurt the flow of new investment proposals:
8
THE REAL STATE OF THE ECONOMY: 2017
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
particularly sharply during the first three quarters
of 2016. During each of these three quarters, the
gross fixed capital formation was lower than its
level a year ago. Further, the y-o-y declines have
Source: CMIE CapEx been increasing progressively.
The lack of policy momentum has also hamstrung Indian organized private
While adverse business conditions accounted for on an average 18.6 per cent
sector investment. The largest Indian private sector groups borrowed reck-
of the investments stalled during 2012-13 through 2014-15, in the past
lessly during an earlier phase, financing natural resource licensing buyouts,
nearly two years it accounted for 32.5 per cent. Adverse business conditions
acquisitions and other large investments through bank borrowings. A very
accounted for 41 per cent of the investments being stalled in 2015-16. In the
large number of these loans, by mid-2016, turned into non-performing assets
first nine months of 2016-17, it accounted for 24 per cent for the
on bank balance sheets. Alarmed, the Reserve Bank of India compelled
implementation-stalled projects.
banks to first recognize them appropriately as bad loans (by March 2016,
NPA on bank balance sheets aggregated Rs 600,000 crore, over 90% of
Promoters cannot access funds usually when the business climate turns ad-
which was on the books of public sector institutions) and then forced the
verse and makes a project non-viable. More often, a promoter loses interest
banks to reset their lending to lower levels, in keeping with international
because of the adverse market conditions. Promoters sometimes explicitly
lending rules known as the Basel norms. Banks have not since been able to
state this to be the reason or merely state that they have lost interest.
finance large private sector investments, throwing a spanner in the works as
far as new industrial projects were concerned.
Government-related reasons either involve a larger public good (such as
protecting the environment) and therefore cannot be resolved in favour of
The finance ministry has unfortunately not responded in any substantive
investments, or they can be resolved by firm executive actions. However,
way to this challenging situation yet. The obvious solution was for the gov-
adverse business conditions are a lot more pervasive and difficult to resolve
ernment to find financial resources to ensure recapitalization of the banks, so
that they would be able to increase
Table 1.3 their lending proportionately. The
Reason for Stalling of Projects 2012-13 2013-14 2014-15 2015-16 2016-17 government has not been able to do
this, so that the private sector has
Government related reasons 74.1 47.2 48.3 17.7 39.4
been left without a vital component
Fuel/feedstock/raw material supply problem 25.5 21.0 12.4 4.4 0.0 of project finance.
Lack of clearances (non-environmental) 22.3 4.8 8.9 2.2 0.6
Lack of environment clearance 11.4 6.1 22.1 3.7 37.4 No large industrial project has taken
Land acquisition problem 14.9 15.4 4.8 7.5 1.4 off in the last eight months as a re-
Business conditions related reasons 11.7 22.2 21.8 40.9 24.1
sult. Rating agency India Rating and
Research (Ind-Ra) reported in Octo-
Lack of funds 2.5 13.9 14.6 3.5 15.6
ber 2016 that capital goods output
Lack of promoter interest 5.3 1.7 1.6 22.2 4.2 had seen 10 consecutive months of
Unfavourable market conditions 3.8 6.6 5.6 15.3 4.3 downturn, clearly signifying a seri-
Other reasons 14.2 30.6 30.0 41.4 36.5 ous investment slowdown. The Index
Natural calamity 0.3 0.0 0.0 0.0 0.0 of Industrial Production (IIP) regis-
Not available 5.5 8.0 2.9 4.0 5.3
tered declines in six out of the first
10 months of 2016. The only reason
Others 8.4 22.6 27.0 37.3 31.3
the IIP showed a spike in November
Total 100.0 100.0 100.0 100.0 100.0 2016 (5.7%) is a base effect: this
Figures in per cent Source: CMIE CapEx was against a corresponding massive
9
THE REAL STATE OF THE ECONOMY: 2017
decline of 3.37% in November 2015, and also because coal availability im- If the pre-demonetisation rate of new investment proposals had continued
proved from near-crisis situations at power stations, allowing higher output during the post-demonetisation period, the quarter could have ended with
of electricity. Manufacturing continues to be moribund. new investment proposals worth Rs.1.89 trillion. This would still be lower
than in the preceding quarter (Rs.1.94 trillion) or the average new invest-
The Demonetisation Impact on Investment ment proposals worth Rs.2.36 trillion since the establishment of the Modi
government.
The industrial investment scenario was already sluggish and certainly not
matching up to the promise of massive investments generated by the early New investments, therefore, had slowed during recent quarters and, demone-
deals concluded by the government. The demonetization exercise has, how- tisation has further slowed down their pace.
ever, hit the industrial sector very hard and for a fresh round of investments
to emerge appears difficult in the medium term. The slowdown in new investment proposals is stark in terms of the number
of new proposals. Only 404 new investment proposals were observed during
The governments sudden decision to demonetise outstanding currency notes the quarter ended December 2016. This is the lowest number of new projects
has broken down not merely payment methods, but in certain cases business announced in a quarter in over a decade. The number of new projects had
models in certain manufacturing industries. Cement majors, for example, are dropped to below-500 for the first time in a decade during the pervious (Sep-
coping with a situation where penetration into rural markets has suddenly tember 2016) quarter. The fall to close to just-over 400 projects is a very
stalled, because erstwhile methods where rural folk paid for their cement in sharp fall to a new low.
cash to a local dealer, who in turn dealt through instruments with the com-
pany, have broken down. There now needs to be a lag period when these On an average 7-8 projects are announced per day. The post-demonetisation
enterprises evolve new ways of accessing traditional markets. Cement and fall in this average to just 3 projects per day reflects a new level of anxiety
building material companies (ceramic tiles makers, for instance) have firmly on the investments front.
moved to the backburner any proposals to add capacity in the near future.
Evidently, uncertainties caused by demonetisation have played a role in the
Monthly automobile sales growth dropped to a 16-year low as demonetiza- fall in the flow of investments. The investments climate has been weak for
tion hit, according to data from the Society of Indian Automobile Manufac- some time. This is now expected to remain weak for some more time.
turers (SIAM). Total vehicle sales slid 18.66%, and two-wheeler sales fell
8% plus, the steepest decline since SIAM began to record data in 1997. Until Over the second week of January 2017, bleak projections have already been
existing capacities return to full utilization, it is unlikely that further invest- sounded. The IMF has cut its GDP growth rate projection for India from
ments will be made in this sector. 7.6% to 6.6%, while the CMIE has reduced its outlook to a bleak 6%
Mahindra & Mahindra declared that tractor sales fell by more than a fifth as One of the ways in which industrial investments could be pulled out of this
demonetization buffeted rural markets. Not only does this provide a measure quagmire is if massive improvements in infrastructure could be made in a
of slowdown in agricultural activity, but also delivers a message on a poten- short period. What is the scenario on the infrastructure front?
tial hit in rural consumption, which would hit a range of FMCG, durables
and non-durables companies, possibly restraining any capital investment 1.3 INFRASTRUCTURE
programs in those sectors as well. Durables and appliances, segments in
which cash credit was traditionally a critical part of channel management, Availability of good Infrastructure is an important factor in attracting invest-
will see postponement of demand, and until systems and processes evolve to ments. Thus, apart from creating jobs, investments in infrastructure also act
replace the traditional incentives these sectors will not add any capacity. as catalyzer for future job creation. Moreover, infrastructure is the greatest
business-enabler and acts as the most powerful multiplier in any economy. It
The impact, in terms of numbers, has been well described in a recent note by also provides infrastructure corporations with steady smooth returns, bond
the Center for Monitoring Indian Economy, authored by Mahesh Vyas (here investors with opportunities for long-term investments and generates jobs
is an excerpt): for local population. In India, the potential for investment in the sector is
massive, but it needs investment from both government and private players.
New investment proposals worth Rs.1.25 trillion were observed during the
quarter ended December 2016. This is low compared to the average Rs.2.36 On one end, the government could not significantly step up the public invest-
trillion worth of new investments seen per quarter in the preceding nine quar- ments because of lack of funds. On the other side, structural issues huge
ters of the Modi government. NPAs and the absence of a strong bond market limit availability of private
funds. Typically infrastructure projects have a long gestation period and fi-
Data suggests that demonetisation has hit the pace of announcement of new nancing by banks is not considered appropriate due to asset liability mis-
investment proposals during the quarter ended December 2016. 227 new match. But, in India, most of the infrastructure projects are funded through
investment proposals worth Rs.818 billion were announced during this quar- banks as there are no alternative avenues to raise enough long-term capital.
ter till November 8. In comparison, only 177 investment proposals worth These massive investments by banks in infrastructure projects have led to
Rs.437 billion were made between November 9 and December 31, 2016. huge NPAs, limiting the availability of capital for new projects.
The fall in investment proposals becomes more apparent when we adjust Perhaps the key difference between India, one of the worlds fastest-growing
these values for the number of days in each period. The quarter consisted of economies, and the developed OECD economies or even China is that the
39 days before demonetisation and 53 days, after. Evidently, the quarter had latter have visibly excellent infrastructure, while India does not. Indian infra-
more days in the post-demonetisation period and yet, the investments during structure roads, railways, aviation as well as energy have transformed
this period was lesser than in the shorter pre-demonetisation period. since the onset of liberalization in the early 1990s, but a lot remains to be
done in this regard. In the Global Competitiveness Report 2015-16 pub-
New investments worth Rs.20.97 billion were announced, on an average, per lished by the World Economic Forum, India ranked 81st in infrastructure, far
day during the 39 pre-demonetisation days from October 1 through Novem- too low for a country whose ambition is to be seen poised for global eco-
ber 8. This average dropped sharply by 61 per cent to Rs.8.24 billion during nomic leadership.
the 53 post-demonetisation period. The number of projects announced per
day dropped from 6 to 3 by a similar comparison.
10
THE REAL STATE OF THE ECONOMY: 2017
When the Modi government assumed office in May 2014, government 2016. By November 2016, it became clear, however, that sheer land acquisi-
spokespersons and ministers have repeatedly painted aggressive scenarios of tion costs for greenfield expressways were going to be prohibitive and politi-
progress in infrastructure. The important policy areas were slated to be the cally extremely difficult. Experts have felt that if instead the government
following: Surface transport (especially highways), railways, electricity, had undertaken judicious expansion of existing highways, the projects
telecommunication and specifically, the setting up of smart cities across would have been easier to implement because land acquisition would not
India. have been either the cost or the hassle that they have turned out to be. The
result: taken as an aggregate, NHAI and non-NHAI road-building is con-
An assessment of available data shows achievements have not yet matched stantly falling short of overambitious targets.
projections.
Railways: ambition unsupported
Highways: unnecessary focus on past achievements
In the second week of November 2016, speaking at a Conference, the Prime
From the outset, the government treated the completion of National High- Minister Narendra Modi asked railway men to work towards the govern-
way as a race, not against realistic targets but more against the accomplish- ments ambitious target of zero accidents. This is a great objective, but there
ment of highway construction under the previous government. This would is one catch: earlier in the year, the finance ministry under Modis NDA gov-
appear to be the case from an examination of a sequence of statements by ernment had turned down Railway Minister Suresh Prabhus request,
Union Surface Transport Minister Nitin Gadkari, who focused on the daily through a letter, for a contribution of Rs 1.2 lakh crore over a five-year pe-
rate of highway construction as the key measure in his successive statements riod for a railway safety fund (more precisely, the Rashtriya Rail Sanraksha
on this subject. His statements provide us with a useful standard against Kosh). Prabhu had written a letter to the finance ministry citing the recom-
which we can assess actual achievement. mendations of the Committee on Railway Safety (2012), headed by the for-
mer chairman of the Atomic Energy Commission Anil Kakodkar. In anticipa-
The National Highways Authority of India is entrusted with highway devel- tion of support, he had already announced Railway Mission Zero Accident
opment, an autonomous agency under the Union ministry of road transport in his 2016 Railway Budget.
and highways. The agency has been implementing highways across India in
six phases for the last 17 years. Along the way, the total length taken up for This calls into question, of course, how exactly the Railways could possibly
inclusion and development within the National Highway program has in- meet its highly ambitious modernization program, of which the safety objec-
creased, other schemes have been folded into National Highways Develop- tives were the heart. It is important to note that the government has not yet
ment Program (NHDP) and, from around 2007 onwards, the private sector demonstrated any policy response to what appears to be a constant slide in
has been increasingly drawn into project execution. earnings of both the passenger and freight businesses of the railways. Re-
vised estimates of the 2016-17 budget suggested that earnings fell short of
The Union Surface Transport Minister made initial claims that highway con- revenue targets by Rs 15,744 crore. Prabhu had projected a turnaround in
struction during the UPA-II regime had slipped to as low as 2 kilometers per 2016-17, but data suggests things are not quite going that way.
day, but had risen immediately upon the NDA government coming to power
to 15 kilometers per day. Dispassionate analysis showed this claim to be The Lok Sabha was told in a reply (as reported by Business Standard, quot-
erroneous. As a matter of fact, construction by NHAI and other agencies on ing PTI) that in the first quarter of 2016-17, passenger revenue was 10%
the ministry's behalf was the highest at 16 km per day during 2012-13 and lower than target. In September 2016, earnings in the goods segment fell by
the second maximum rate of building road was during 2009-10 at 14 km, 9.86% and in the passenger segment by 10.86%.
both during the UPA-II regime. The minister also emphasized, in one of his
statements, that the ministry under him had awarded 7,980 km of highways Already the operating ratio of the railways is squeezed at 90%, and may be
in 2014-15 compared with 3,621 km during 2013-14 (the last fiscal under squeezed even further to 92 this fiscal. This implies it would be difficult to
UPA II). While this was true, statistics show that UPA-II awarded 9,791 km generate any sort of internal allocation for a total requirement of Rs 5 lakh
and 9,500 km, respectively, during 2011-12 and 2012-13 progress had crore for modernization (of which Rs 1.2 lakh crore, as mentioned above, is
been uneven due to various factors but not completely non-existent, as Gad- for a core safety program). It would appear that the government might resort
kari had claimed. of monetizing land held by the railways, but this could only possibly be a
one-time measure, and will deplete valuable assets.
In all these comparisons with previous regimes, there appears to have been a
slippage in the NHAIs performance against a stiff target it was set in April There are two implications of this situation. First, the government has been
2017 by the government. Mint reported, quoting a Jeffries India research making claims of projected modernization that are far too ambitious these
report, in November 2016 that the target set for award of projects for 15,000 cannot, and unsurprisingly have not, been backed by financial resources.
km of road building in April for NHAI (out of a total highways and express- Second, the government needs to urgently spell out a vision for the railways
ways target of 25,000 kilometers) was nowhere close to being achieved. The for investors and market players who might be approached to fund at least a
NHAI has not awarded more than 2,360 km in the first half of the year (a substantial part of the modernization fund requirement. Such vision must
mere 16% of the target), and it does not appear it is even close to achieving spell out how, in the face of slowing demand for its services vis--vis avia-
the remainder of the target by the fiscal-end. tion and roadways, the railways can have a sustainable and profitable future.
Announcing enormous projects without financial backing is not going to
Of the target, the non-NHAI portion is also languishing. Highway building help.
is not the only area where the government has slipped on implementation.
Expressways are an important method for linking cities. The Mumbai- Electricity: not really hundred percent
Vadodara expressway was one such proposal, and work on this was expected
to kick off by December 2016. The government had not succeeded by No- Speaking at the Wembley Stadium in London before a non-resident Indian
vember 2016, however, to even complete land acquisition for the 268-km audience in November 2015, Prime Minister Modi had set himself a dead-
long Gujarat portion of the project (whose total length was to be 370 km; the line to ensure that electricity reaches over 18000 Indian villages which at the
total project cost was originally estimated at Rs 6670 crore). time did not receive any electricity at all. Accordingly, the union power min-
istry, led by Piyush Goyal, has been making intense efforts, transparently
Also, the government announced Rs 2 lakh crore worth of massive express- documented in the Grameen Vidyutikaran app that allows all Indian to
way building in the poll-bound states of Uttar Pradesh and Punjab, earlier in
11
THE REAL STATE OF THE ECONOMY: 2017
The table projects a surplus in the Western and Southern regions while it
projects a substantial deficit in the Eastern and North-eastern regions, as
well as a small but still significant deficit in Northern India. If we choose to,
for the moment, ignore the regional imbalances as a problem, this projects a
small overall surplus for the country as a whole.
Table 1.4
Energy Peak
State/Region Requirement Availability Surplus(+)/Deficit(-) Demand Met Surplus(+)/Deficit(-)
MU MU MU % MW MW MW %
Northern 357459 351009 -6450 -1.8 55800 54900 -900 -1.6
Western 379087 405370 26283 6.9 51436 56715 5279 10.3
Southern 310564 320944 10380 3.3 44604 40145 -4459 -10.0
Eastern 151336 135713 -15623 -10.3 21387 22440 1053 4.9
North-eastern 16197 14858 -1339 -8.3 2801 2695 -106 -3.8
All India 1214642 1227895 13253 1.1 165253 169503 4250 2.6
12
THE REAL STATE OF THE ECONOMY: 2017
Box 1.3: The Rural Electrification Data: Reality Beyond the Numbers
Prime Minister Narendra Modis 2016 Independence Day speech, claimed that 10,000
of the 18,000 unelectrified villages (according to 2011 Census data) have been electri-
fied. A close check of the governments own real-time data for full rural electrification
shows that the gap between official claims and ground reality is stark.
Nagla Fatela, the poster village that the PM spoke about in his speech is electri-
fiedonly in the power ministrys records, but not in reality. Though poles, wires and
meters were put in place, actual power supply is still a distant dream for the villagers of
Nagla Fatela.
A closer look at the electrification data from the hinterland especially from states
such as Bihar, Uttar Pradesh, Assam, Jharkhand and Odisha shows that a sizeable
number of the households in villages across most states are still in the dark, without
access to electricity. For instance, the 97.9 per cent, 99.5 per cent and 95.3 per cent of
the villages in Bihar, Uttar Pradesh and Assam, respectively, have been deemed electri-
fied, as per the Central government data. Yet, as per the data provided by the govern-
ments of Bihar, Uttar Pradesh and Assam, 82.84 per cent, 72.97 per cent and 62.93 per
cent of their rural households, respectively, are still without any access to electricity.
Why then are there such immense discrepancies in the data put out on the Central gov-
ernments website?
One major source of discrepancy regarding the real-time data on electrified villages as
made available to the public through the governments GARV mobile app and web dash-
board could be attributed to the process deployed to monitor the electrification process
and enter the data on the GARV application. There was a large inconsistency in the
data, as reported by the Gram Vidyut Abhiyantas (GVAs) who report firsthand informa-
tion regarding this villages, and its transformation to the numbers highlighted on the
app. When this discrepancy was pointed out, a senior official of the Rural Electrifica-
tion Corporation (REC), the nodal agency for rural electrification said: We put a lot of
emphasis on photos. If there is a pole and distribution line visible in the photos, we call
it electrified. This perhaps could be one of the reasons leading to the inflated number,
as the presence of electrical infrastructure doesnt automatically translate into electrifica-
tion.
What is the point in calling a household fully electrified if power is available only for
three to four hours? Also, if only 10 of 100 households in the village have power con-
nection, how can one call that village electrified in its true sense?
Rather than village electrification, the actual data to be analyzed is probably that of
intensive electrification; which truly shows the extent to which rural households have
access to electricity. In states such as Uttar Pradesh, Jharkhand and Bihar the intensive
electrification statistics stand at 22 per cent, 24 per cent and 50 per cent, respectively.
Out of total 7.28 lakh villages which were planned to be intensively electrified, only
3.77 lakh (52 per cent) were completed as of last month. In comparison, 98.7 per cent
villages have been electrified till date.[3]
Besides, there have also been reports of uninhabited villages being classified as electri-
fied. Examples are Panalomali, Kusadangar and Patyetapali in Odisha and Sunwara in
Madhya Pradesh, all counted as electrified villages, but no one lives there anymore.
This summarizes the problem of claims and reality. The count of villages being electri-
fied, that is flaunted on social media by the government seems to be nothing more than
a sales target exercise, and does not provide the real picture of the rural India.
13
THE REAL STATE OF THE ECONOMY: 2017
Chapter 2
Unraveling Urbanisation
A Lost Opportunity
Cities are cauldrons of wealth and knowledge creation. They form the eco- amount to anything transformational. It was declared that the Mission
nomic, creative and cultural backbone of human societies. Cities can pro- would cover 100 cities for a duration of five years starting from 2015. The
vide the jobs and opportunities that will enable millions of youth to generate Central Government proposed to give financial support to the Mission to the
Indias demographic dividend. The policies that shape our cities therefore extent of Rs. 48,000 crores over five years. It sounded substantial. It soon
have the potential to transform our nation for the better or worse. became apparent though that it worked out to nothing more than an average
Rs. 100 crore per city per year. An equal amount, on a matching basis, will
As per the 2011 Census, for the first time since independence, the absolute have to be contributed by the States/Urban Local Bodies (ULB). The bal-
increase in population is more in urban areas than in rural areas. The level of ance investments would have to be mobilised from private investors willing
urbanisation increased from 27.81% in the 2001 Census to 31.16% in the to be part of Special Purpose Vehicles (SPV) or through loans from financial
2011 Census. Urbanisation is now increasing at a steady average rate of institutions.
2.4% annually, while the rural increase is just 0.7% annually. This indicates
the trend towards migration to urban centres. A US-India Business Council report on smart cities in India says to rede-
velop a city as smart; an investment of at least $10 billion is required. For
There is however a big gap between the pace of urbanisation and the provi- 100 cities, it works out to $1 trillion. It was optimistic to hope to raise re-
sion of infrastructural facilities required for supporting such a large exodus sources from the private sector without addressing municipal reforms. The
of population. As a consequence, the urban environment, particularly in SPV arrangement has been tried for some public transport projects like
large cities, is deteriorating very rapidly. All cities have acute shortage of Metro, BRT and City Bus Systems only but never at a city level.
housing, water supply, sewerage, developed land, transportation and other
facilities. This neglect is primarily due to lack of investment, as India's an- What makes a city smart though? Partha Mukohpadhyay from the Centre for
nual capital spending on urban infrastructure in per capita terms is only $17 Policy Research says, The discourse on smart cities revolves around infor-
as against $116 for China and $391 for UK. mation and communication technology (ICT), but a computer is seen as
fundamentally un-smart, since it can only do what someone else has pro-
These deficiencies are particularly severe for the urban poor and have seri- grammed it to do. To be judged as smart, a basic prerequisite is the ability to
ous housing and livelihood consequences for them. Inadequate finances and decide and act independently; to have, what philosophers call agency.
investment, hostility towards migrants, weak municipal institutions and poor Smartness requires the people in a city the citizens to first, be able to
delivery systems have constrained urban administrations ability to improve establish institutions to choose among alternatives, and second, to pick a
living conditions for the urban poor. Cities will not only need better infra- path towards a goal of their choice. If a city is able to proceed on such a
structure but better governance as well. path, it should be considered smart, else not. By trying to run a city like an
infrastructure project though, it was hardly making it smarter.
It was against this backdrop that the BJP under Narendra Modi launched a
high decibel election campaign and made a litany of promises to an increas- In a first, citizens were engaged through on-ground surveys to help prepare
ingly urbanising and aspirational India, including: plans for their city. It soon turned out that the exercise was mostly at a su-
perficial level and mostly dependent on the quality of the consultancy firm
We will initiate building 100 new cities; enabled with the latest in technol- hired by the government to prepare the city plan through a competition. 37
ogy and infrastructure - adhering to concepts like sustainability, walk to consulting firms were appointed for preparing action plans for 88 cities.
work, etc., and focused on specialized domains. Basically, the government had to outsource its planning. It was only follow-
ing the trend where the state continues to abdicate its responsibility of pro-
Major steps will be undertaken in Transport and Housing for 'Urban Up- viding public services.
liftment' in India.
Moreover, the selection criteria favour cities that are already doing well,
Build quality integrated Public Transport systems, discouraging usage of both in financial and management terms. These 100 cities are also covered
private vehicles. by the Atal Mission for Rejuvenation and Urban Transformation (AMRUT)
scheme, which will provide funds for basic utilities such as sanitation pipe-
2.1 SMART CITIES, UN-SMART MOVES lines. Despite the convergence of other schemes to aid the development of
smart cities, the funds will not suffice. As a Business Standard report put it,
at most it would amount to a hundred smart colonies.
After coming to power, the Modi government immediately toned down its
promise of a hundred new cities to a lite-version of a hundred smart cities,
Developing smart pilot colonies, too, will require more money than cur-
which would no longer focus only on green-field projects.
rently being offered by the government. In fact, a 16.5-acre redevelopment
project in Mumbai had a cost about Rs 3,000 crore. By contrast, under the
When the Finance Minister announced the outlay in the 2014 Budget, it
Smart Cities programme, for much larger pilots and pan-city activity, state
became clear that the newly launched Smart Cities Mission would not
1
THE REAL STATE OF THE ECONOMY: 2017
and central support add up to Rs 1,000 crore through five years. Therefore, 2.2 OLD WINE AS NEW AMRUT?
at the end of five years, the program would have hardly amounted to any-
thing more than a neighbourhood development project in many of the cho- In principle, AMRUT seems like a remodelled version of JNNURM. The
sen cities. striking difference between the two is the coverage, as AMRUT is just lim-
ited to 500 Class I cities. Whereas the JNNURM was applicable to all
Out of the 98 selected smart cities, 91 are class I cities, the remaining are towns and cities as per 2001 census and covered 65 big cities and 1274
class II, III and IV cities. Also, out of the 98 selected smart cities, 49 had small towns till 2012. Also the outlay for AMRUT is only 37% of the total
been included under the big city schemes of Sub-Mission for Urban Infra- outlay for JNNURM. The mission period for AMRUT is also five years
structure and Governance (UIG) and Sub-Mission for Basic Services to the which is shorter than the 7 years given to JNNURM, which was further
Urban Poor (BSUP) under the UPA governments Jawaharlal Nehru Na- extended for two more years.
tional Urban Renewal Mission (JNNURM) and accounted for Rs 27,829
crore and Rs 23,390 crore of central share committed and released respec- The Ministry of Urban Development has cleared the first batch of AMRUT
tively. The question that begs to be asked is, whether the Union Govern- projects in 89 cities in 3 states. It is interesting to note that all these 89 cit-
ment could have dovetailed these projects with the newly launched Smart ies are class I cities (except Dwarka in Gujarat) and 61 of these cities had
Cities Mission. The Modi government in its heady rush to start afresh, has been covered under the JNNURM earlier. Table 2.2 shows that the total
probably lost an opportunity to build on the foundation of previous pro- cost sanctioned for the 89 cities under AMRUT is 20% of the total cost of
grams. Table 2.1 shows that only Chandigarh, Raipur and Navi Mumbai JNNURM projects in 61 of these cities as of 2012.
have completed all their projects under UIG whereas under BSUP none of
the cities have completed all the sanctioned projects. Table 2.1 shows that
Even across a ten year time-period and large sums of central investments
most of these cities have not completed any of their projects even though
could not lead to completion of projects. Moreover Rs 43,974 crore of cen-
they are comparatively larger cities.
tral share was committed to the 65 big cities under UIG and BSUP which is
almost the entire outlay for 500 class I cities under AMRUT. Thus it ap-
Additionally, of the remaining 49 selected smart cities, 45 were included pears that the government has not implemented any learnings from the expe-
under the small town schemes of Sub-Mission for Urban Infrastructure rience of JNNURM while designing AMRUT.
Development of Small and Medium Towns (UIDSSMT) and IHSDP. Out of
these 22 cities were included in both UIDSSMT and IHSDP whereas 12
The JNNURM addressed a larger share of the urban population by covering
cities were only included in UIDSSMT and another 11 only included in
both big cities and small towns. Even then it focused on the big among
IHSDP. Under UIDSSMT, 10 out of 34 cities have completed their projects
small towns as it covered 65 big cities and 1274 small towns out of the total
whereas under IHSDP 10 out of 36 cities have completed their projects
5161 towns as per 2001 census. If nothing else, the JNNURM exposed the
which means that cities that were included in the small town schemes of
lack of capacity at the city level and the inadequacy of the project based
UIDSSMT and IHSDP and had lesser populations performed better and
approach. The next phase of JNNURM was supposed to focus on small and
were able to complete a larger share of projects as compared to the bigger
medium towns as the previous phase highlighted the disparity in fund allo-
cities included under UIG and BSUP.
cation between small and big cities. The AMRUT should have taken this
approach forward by including smaller cities rather than focusing on class I
The SPV will also have central government representatives on its board, cities that will in any case have better infrastructure and governance provi-
along with those from the state and urban local bodies. The Centre has rec- sions. Policy makers need to focus on the benefits of small town growth
ommended the SPVs Chief Executive Officer be delegated powers under instead of overlooking their potential by allocating a much smaller share of
the municipal and relevant state laws. It also suggests urban development central investments to these towns and cities that is straining their very exis-
boards, local self-governments and other state departments delegate rele- tence.
vant approval and decision-making powers to the SPV. This could lead to a
turf war.
JNNURM had also mandated devolution of all 18 functions mentioned in
the 12th Schedule of the 74th Constitutional Amendment. But 24 years
While the Centre recommends these powers be handed to the SPV, experts after the 74th Amendment, only 12 states have fully devolved all functions
indicate it is unlikely that such powers will be transferred in entirety. State to their respective municipal governments. Other states show varying de-
authorities, where favourable, might amend regulations for the pilot pro- grees of devolution, with Northeastern states, except Assam and Tripura,
jects, while retaining most powers. performing the worst. It is also important to note that legislative devolution
does not imply actual transfer of functions. Many functions like water sup-
The creation of SPVs and the intent to leverage investments from the pri- ply, slum improvement and urban planning continue to be performed by
vate sector are a departure from the JNNURM that primarily relied on parastatals or development authorities. Only if AMRUT is truly able to
ULB/Parastatal agencies for implementation of projects. It also threatens to raise the capacity of urban local governments through funds, functions and
hamper the notion of decentralized and democratic decision making. If the functionaries will the service delivery in our cities improve.
smart cities were chosen because of better institutional capacities and past
track record, their performance under JNNURM should have been a lot 2.3 Housing for All A Pipedream?
better.
The United Nations estimated (in 2014) that much of the population in-
Before the launch of the Smart Cities Mission, the greenfield GIFT City of crease in India between 2015 and 2030 will take place in urban areas. The
Gujarat set up SPVs for utilities like water infrastructure, waste manage- rapid pace of urbanisation owing to ruralurban migration is putting high
ment services, ICT services, etc. But the performance of these SPVs cannot amount of stress on urban infrastructure and is likely to result in a massive
be assessed at this stage as the GIFT City project has been marred with shortage of urban housing.
delays and has not got many takers yet. The international experience with
SPVs too has been a mixed bag. Therefore, overall, the Smart Cities Mis-
The existing shortage in housing is already prominent within the EWS
sion is doomed to irrelevance in the larger scheme of things.
(economically weaker sections) and LIG (lower income groups) segments,
and is estimated at 18.78 million households (as per 2012 estimates).
2
THE REAL STATE OF THE ECONOMY: 2017
Land remains a price-sensitive commodity and its current shortage in ma- Officials concede that the very cause of promoting rental housing was de-
jor city centric areas is not allowing development of affordable housing. feated the moment the government decided to exclude the rental component
from the purview of Housing for All by 2022. When the NDA govern-
Affordable housing is largely concentrated in peripheral areas where con- ments flagship shelter mission was finally launched, it was only about pro-
nectivity and infrastructure development remain a challenge. viding 20 million houses on an ownership basis by 2022 with an approxi-
mate central commitment of Rs 3 lakh crore. There was no mention any-
Rajiv Awas Yojana, a key scheme, launched in 2011 for rehabilitation of where about ensuring that 20 per cent of the units should be for rental hous-
slums, envisages provision of tenure security to slum dwellers. This should ing, as was proposed earlier.
form a key element of strategy to ensure inclusive growth as it would facili-
tate transition of the urban poor from the informal to formal sector. Interest Development economist Amitabh Kundu said that the under the second five-
subsidy on bank loans for the poor for housing should be introduced. It is year plan, there was public sector creation of rental housing. But they soon
ironical that the rich get income tax rebate on housing loans, but the poor get realised that managing rental housing is impossible from the point of recover-
no such benefit from government. ing rents or getting repossession of the units. Since the sixties, there has
been no major public sector intervention with regards to rental housing. As
The Report of the Technical Group on Urban Housing Shortage (2012-17) per census 2011 data, 11.09 million houses are vacant in urban areas.
identifies a shortage of 18.78 million houses. About 95% of this
shortage pertains to households with a monthly income of less than
Rs 10,000. What the report fails to recognise is that a majority of Urban Housing Benefits - A Reality Check
these households are unlikely to be able to afford to buy a home at
prevailing prices. In 2012, the ISB-CEMS report on affordable
housing estimated that only those with a monthly income of above In order to provide a sop to urban citizens after demonetization, on December 31, 2016, Prime
Rs 7,500 could afford to buy the most inexpensive affordable Minister Modi announced that: "Two new middle-income categories have been created under
home on the market at the time. This is under the assumption that the Pradhan Mantri Awas Yojana (PMAY) in urban areas. Loans of up to Rs 9 lakh taken in
they would be able to access a home loan from a bank, which itself 2017, will receive interest subvention of 4%. Loans of up to 12 lakh rupees taken in 2017, will
presents a host of problems those living and working outside the receive interest subvention of 3%."
formal sector.
Fact check:
Current housing policy rests on two problematic assumptions:
The PMAY is a revised version of Indira Awas Yojna that ran prior to the advent of the NDA
1) Demand for housing in cities translates into demand for home- government. It is the schematic version of Housing For All commitment of the government
ownership. under which it wants to build 20 million houses by 2022.
2) The private sector can meet the demand for affordable housing Besides other components of the scheme, so far the interest subsidy of 6.5% was available un-
given the right incentives. der several conditions for loans up to Rs 6 lakh. For those earning incomes up to Rs 3 lakh an-
nually a house of 30 square metre was allowed and for those earning between Rs 3-6 lakh per
However, the economics of delivering low-cost homes to the af- annum a house of 60 square metre is permitted.
fordable segment was infeasible. Government policies have re-
mained blind to the reality that the poor often choose to live in The announcement is merely an enhancement of existing benefits.
squalor in order to access employment opportunities and social
networks in and around central city slums, rather than be moved to The stark reality is that under all the three components of the scheme, between April 2015 -
sanitised and disconnected projects on the outskirts. The promise December 6, 2016, only 6,716 houses have been completed. Another 1,52,686 have broken
of owning a home may not in many cases compensate for the loss ground for construction and work is yet to start on 5,58,229 houses. The Centre has so far re-
of livelihood. The fact that only a small proportion of funds from leased Rs 4,275 crore against its share of Rs 18,854 crores so far. Data was not separately avail-
JNNURM and RAY have been utilised for slum upgrading pro- able for houses built using the credit subsidy component of the scheme.
grammes underlines this myopic attitude.
The need to create rental housing, not only as Andhra6 24 4989.5 2675.8 31 662.9 6
an interim arrangement for those saving up to Pradesh
own a home, but also for those who simply can-
not afford to buy, has finally been recognised Gujarat 20 7156.7 3292.8 31 1149.7
by the Union government. The acknowledg-
ment comes in the form of the draft National
Urban Rental Housing Policy, 2015, which will,
for the first time, provide a policy framework to Rajasthan 17 1654.3 997.7 28 899.0
address the issue that has until now been over-
shadowed by an overbearing emphasis on own-
Total 61 13800.5 6966.4 90 2711.5 1356.2
ership housing. The Centre, on its part, has re-
frained from making any financial commitment
to promote rental housing.
3
THE REAL STATE OF THE ECONOMY: 2017
This has been attributed mainly to the low rental yield, problems with repos-
session and lack of incentives for renting property.
If the number of houses constructed remains much less than two lakhs a year
it would be impossible to reach the target of housing for all by 2022, when
the slum population alone is 6.5 crores. This does not cover a large number
of homeless living outside the defined slums, either on the roadside or in
shanties. Therefore, the stated objective of nearly 20 million urban homes by
2022 appears likely to be missed given the slow progress at present.
2.4 CONCLUSION
The overall thread that emerges from the urban chronicles of the Modi gov-
ernment is that it has failed to imbibe the learnings from two pioneering
programs of the UPA, JNNURM and RAY. In the case of RAY, they have
done away with aspects of a progressive policy, that respects the social capi-
tal of the urban poor. It is a fact that it is more cost-effective to build on exist-
ing infrastructure, than build anew. It is also a fact that citizens build their
own cities. This happens in many ways and some fall in the grey zone. The
way we currently plan our cities limits rather than facilitates citizen-led ur-
ban development.
4
demand
0%
0%
THE REAL STATE OF THE ECONOMY: 2017
Chapter 4
Social sector policies under the Modi government have involved the system- The current governments lack of commitment towards social justice and
atic undoing of credible institutions and an engagement with legacy social human development is a testament to their political ideology. Over the past
programs as an afterthought. The lack of investment in human capital, cou- five financial years there has not been a significant increase in either educa-
pled with slow job creation has resulted in Indias much-anticipated demo- tional or health care expenditure, despite inflation. In fact, the proportion of
graphic dividend being slowly wasted away. the total expenditure spent on education decreased from 11.6% to 10.9% in
the year 2014-15. As a proportion of total state government expenditure,
Indias GDP growth forecasts have fallen sharply, and job creation has been social sector rose steadily from 32.9% to 38.2% in 2013-14, and then fell to
dismal over the last 2.5 years. With growing unemployment exacerbated by 36.1% in 2014-15. Social policy since 2014 has manifested itself in disman-
the blunder of demonetisation, the Union Government ought to rethink its tled entitlements and increased delays to an already dwindling pool of invest-
lack of a cohesive social policy. When economic policy is proving to be a ment. The tragedy for dedicated civil servants is that they are caught amidst
failure in creating jobs (as has been outlined in the chapters thus far) the a drastic transformation from accountability to the poor and the rights of the
governments response has been one largely opposed by development theory citizen, to accountability to the whims and fancies of a leader who pays
to cut back on investing in human capital. In addition, the most vulnerable greater heed to event management than material realities.
and disadvantaged groups are facing renewed discrimination.
Insincere Indierence
Major budget cuts in funding programmes for primary education and health-
care (as have been analysed in further detail). This has created a situation The deer in the headlights predicament of bureaucrats demands a closer
where states are unable to compensate for a Union Government not commit- look. This is a situation where the highest helm of leadership has virtually
ted to building human capital. It is time for the NDA to move away from no track record of enabling a good standard of living for all. If we look at
catchphrase schemes and focus on holistic development, with a well- social indices of the so-called Gujarat Model, they fare lower on metrics
rounded framework for social justice and human development. across all sectors in comparison to metrics achieved by most other states.
These numbers are significantly below not only Indian states such as Kerala
and Sikkim, but are hardly of any repute in the international community. The
below table is a clear indicator that the social policy in India is in the hands
of a Prime Minister with a sketchy com-
mitment to social justice.
Fig 4.1: Untied Funds to States
Untied Funds to States Dismantled Institutions
80%
67% 69% A trend has emerged with the govern-
70% ment systematically undercutting institu-
60% 58% tional frameworks that have hitherto held
57% 57%
60% 53% 54% the fabric of nation building. Manifesta-
tions of this are seen in the virtual disap-
50% 44% pearance of the Panchayati Raj system
40% from policy discourse, and the much
40% more publicised move from the Planning
Commission to the NITI Aayog.
30%
A closer analysis of the figures reveals
20%
the strategy of the BJP government has
10% been to attack three of the Ministry of
Panchayati Rajs (MoPR) key pro-
0% grammes the Backward Regions
Tamil Nadu Maharashtra Haryana Uttarakhand Telangana Grants Fund (for addressing issues of
infrastructure and capacity gaps in back-
FY 2014-15 Actuals FY 2015-16 RE ward districts) and the Rajiv Gandhi Pan-
chayat Sashaktikaran Abhiyan (RGPSA).
Source: Ministry of Finance!
Between FY 2006-07 and FY 2010- 11,
1
THE REAL STATE OF THE ECONOMY: 2017
Table 4.2: Gujarat Social Ranking in 10 years drinking water, improper disposal of human excreta,
Category 2001 Rank 2011 Rank Improvement in lack of personal and food hygiene, and improper dis-
Rank
posal of solid and liquid wastes are major causes of
Head Count Ratio (Poverty) 14 14 0 disease in India. Providing accessible, affordable, and
Percentage of Households with access to Banking Services 10 14 -4 equitable sanitation, to all sections of the population is
Female Literacy 15 15 0 one of the key objectives of the Government. The Na-
Percentage of Households with Electricity 6 10 -4 tional Rural Drinking Water Program (NRDWP) and
Percentage of Households with Latrines 14 16 -2 Swachh Bharat Mission (SBM) are the two flagship
Source: Poverty Performance Under Modi Governemnt by Ashok Kotwal & Arka Roy Chaudhuri
programmes of the Government of India for rural
drinking water and sanitation. However, the real ques-
allocations for MoPR more than doubled from 2,000 crore to 5,171 crore. tion is are these schemes testaments to this govern-
In FY 2014-15 however, a mere 3,401 crore were allocated to MoPR. Allo- ments agenda for social upliftment or merely old wine in new bottles?
cation of funds to the Ministry now stands at a paltry figure of 95 crore,
leaving no doubts to the intention of the government. The idea appears to Swachh Bharat Mission (SBM)
be draining the ministry of funds so that its eventual closure goes unno-
ticed. However, also at stake are the crucial legacies that have shaped the The Swachh Bharat Mission (Gramin) launched on 2 October 2014 aims at
course of Indias history and policy thus far. attaining an open defecation free (ODF) India by 2 October 2019. At the
time of its much-hyped launch the objectives of the programme were multi-
The transition from Planning Commission to NITI Aayog occurred to facili- fold, but poorly planned at best.
tate the creation of a government-run think tank. In any democracy, the
primary need of a government think tank is to research the implementation The mission aimed to bring improve quality of life in rural areas by promot-
of policy and suggest avenues of improvement and course correction. A ing cleanliness, hygiene, and eliminating open defecation, via
healthy atmosphere of critique and evaluation needs to be encouraged in a
transparent environment, which maintains a healthy distance from the gov- Provide access to toilet facilities to all rural households.
ernment.
Motivate communities and Panchayati Raj Institutions to adopt sustain-
The erstwhile National Advisory Council from the UPA era, along with the able sanitation practices.
Planning Commission, fostered debates and nurtured ideas that eventually
led to the passing of landmark social legislations. On the contrary, the NITI
Aayog has thus far served as a propaganda tool for the
government to translate its inequitable economic mes-
sage down to bureaucrats and out into the public do- Fig 4.3: Open Defecation
Open Defecation
main. The Vice Chairman and other members have
85%
83%
lost no opportunity to spin the governments policy in 90%
77%
74%
80%
69%
69%
64%
70%
sions, making it difficult for bureaucrats within differ-
60%
ent ministries to raise their voices about genuine prob-
44%
43%
30%
20%
20%
every other promise of the Prime Minister Modi, it
10%
eerily rings hollow.
0%
4.1 SANITATION Bihar Bihar Purnea HP Kangra HP Solan Maharashtra MP Sagar Rajasthan Rajasthan Rajasthan Rajasthan
Nalanda Satara Jaipur Jhalawar Jhunjhunu Udaipur
At least one member other than the head defecates in open Head defecated in open on the date of survey
Research has shown that a direct relationship exists
between water, sanitation, health, nutrition, and hu- Source: Accountability Initiative Fund Tracking Survey (PAISA), Dec 2015
man development. Consumption of contaminated
2
THE REAL STATE OF THE ECONOMY: 2017
as ground level realities show that the programme was inundated with
Box 4.1: A Case for Why Social Sector Spending is Inextricable from Larger- flaws. (Ref Fig 4.3)
Macroeconomic Performance
Grants Failing to Reach Target Groups for Building Toilets
Governments focus has been to boost demand in the economy through infra-
structural investments while it has ignored the crucial sectors of health and As per the annual targets, there should have been 25,00,000 household
education in the successive budgets, very much at the mercy of state. However, toilets and 1,00,000 public and community toilets been built from the
recent studies show that the agenda of health and education does not just hap- period October 2014 to 2015-16. However, as per the report by SBM,
pen to be the necessities of welfare state but they go a long way in improving only 53% (13,26,226) household toilets and 69% (68506) community
the macroeconomic fundamentals- higher growth, lower government debt, toilets were built till April 2016. In addition, as per a survey conducted
lower inflation and can create much-needed jobs and boost economic growth. by Accountability Initiative (AI), it was observed that 29% of the house-
holds in the achievement list did not have the toilets. 48% of the total
households had at least one-member defecting in open. (Ref Fig 4.4)
Research by HSBC shows that the spending in health and education have a
higher fiscal multiplier than the capital expenditure and current spending (sub-
sidies, wages, interest bills etc.) Even in Himachal Pradesh, which has the maximum number of ODF
villages, at least one member still defecates in the open in about 25% of
the households surveyed. So apart from not meeting ambitious targets,
Fig 4.2: Impulse Response of GDP to Increase in Public Expenditure
Impulse response of GDP to increase in public expenditure the government is also putting out falsified achievement numbers.
!
Rise in GDP growth due to one pt increase in the
4
Uncoordinated Panchayat and Community Involvement
3
The SBM mandates that Swachhata Doots and Swacchta Samiti be em-
expenditure/GDP ratio
2
ployed in every village to promote awareness and encourage toilet usage.
1
However, as the graph above shows, households were unaware that their
0 village had Swachhata Doots and Samitis, which depicts that the reach of
1 2 3 4 5 6 7 8 9 10 awareness is low, despite a high-decibel personal campaign by the Prime
Current Expenditure Minister. On an average, less than 5% people of a particular surveyed
Health Expenditure area know about either the Swachhata Doots or the Samitis. With uncoor-
Quality adjusted Health Expenditure dinated community involvement, the flagship programme is turning into
Capital Expenditure
Source: HSBC estimates nothing but a toilet drive. Imposing all focus on toilet construction and
barely any on community mobilization, implies a target driven approach
that will not lead to any long term gains in a mission that ultimately predi-
Poor Social Infrastructure Contributes to Higher Inflation in the Long Run cated upon deep rooted behavioural changes. (Ref 4.5)
As the N K Singh headed new Fiscal Responsibility and Budget Management Reasons for Failure
committee have reiterated the importance of lower government debt and defi-
cits, health and education become crucial to conquer the medium term infla-
The programme was a failure for the following reasons. First, contrary to
tion target of 4 per cent. The supply constrained health and education may
the proposed norm of every eligible BPL/APL household getting a grant
emerge as the main culprits that will likely keep inflation above 4%.
to build the toilet (if they apply), the PAISA survey conducted by Ac-
countability Initiative revealed that less than 43% people who applied for
Supportive Social Infrastructure as Imperative to Meeting An Increasing Re- a grant actually got one. The most disturbing figures are for the Jhalawar
quirement for Domestic Jobs district in Rajasthan where out of the 88% who applied, only 33% got the
grant. It is likely that these figures are also off by a large margin, as the
In wake of weak global demand and sluggish domestic demand especially after PAISA survey complains of inaccessibility of reliable data, further cast-
demonetisation, business-as-usual suggests that there will be 24m missing ing doubt on the governments credibility. The slow policy implementa-
jobs. Sectors Like health and education can be the domestic drivers to fill the tion as is evident from the case of grants barely reaching those vulnerable
gap that will not only ensure employment but shall be instrumental in achiev- households who need them the most, and in small numbers even in the
ing socio economic goals along with political stability. This is not a choice but event they do reach the target group, has been explained graphically
a national imperative. above but cannot be stressed enough.
3
THE REAL STATE OF THE ECONOMY: 2017
4.2 HEALTHCARE
Fig 4.4: Receiving SBM Grant
Receiving SBM Grant
120% National Health Policy (NHP)
83% 88%
79% Three years into its term, the government
90% 74%78%
is yet to articulate a road map for health.
55% The draft national health policy remains
60% 46% 47% 45%
just thata draft. The most recent draft of
30% 34%32% 33% 30%
25% the NHP came in early 2015. The draft of
30% 21%
NHP 2015 focuses on addressing the ur-
gent need to improve the performance of
0% health systems, and acknowledges the two
Bihar Bihar Purnea Madhya Maharashtra Rajasthan Rajasthan Rajasthan Rajasthan way linkage between economic growth
Nalanda Pradesh Satara Jaipur Jhalawar Jhunjhunu Udaipur and health status and Government to lev-
Sagar erage economic growth to achieve health.
% of HHs that applied for a grant constructed a toilet in the last two years % of HHs that received a grant Research however has shown that this link-
age has not just failed to work for India a
Source: Accountability Initiative Fund Tracking Survey (PAISA), Dec 2015
truly vast polity, but has backfired for the
economy.
Fig 4.5: Awareness : Swachhata Doots and Swachhata Samitis
Awareness : Swachhata Doots and Swachhata Samitis While the draft of NHP 2015 was placed in
public domain for comments in early 2015,
76%
its real status has been pending for the past
two years. As of the last update in October
2016, it is still under consideration of the
60%
health minister. Given this scattered state
of affairs, health advocates have expressed
40% concerns about the governments commit-
ment towards its operationalization. Their
fears are not unfounded considering the
20% 14% state of poor implementation of the Na-
10%11% 11%
6% 5% 6% tional Health Mission (NHM) for the past
1% 0% 2% 0% 3% 1% 3% 3% 1% 2% 1% 1%
few years. Thus, it is very likely that the
0%
Bihar Bihar HP Kangra HP Solan MP Sagar MP Satara Rajasthan Rajasthan Rajasthan Rajasthan NHP is gathering dust without ownership
Nalanda Purnea Jaipur Jhalawar Jhunjhunu Udaipur from the government.
% of villages report presence of swacchhata doot % of villages reporting panchayat swachhata samiti
Unrealistic Budgetary Allocations
Source: Accountability Initiative Fund Tracking Survey (PAISA), Dec 2015
The budget for 2016-17(financial year) for
In conclusion, Swacch Bharat Mission, in spite of being a high-voltage cam- the National Health Mission is Rs. 19,437 crore, which is almost the same as
paign has not delivered the goods. The focus on glitzy marketing and hype, 2015-16 (Rs. 19,122 crore). Inadequate budgetary allocation to health has
combined with unrealistic targets for the bureaucracy, has diluted the atten- been a concern for more than five decades and continues to be so. The NHP
tion required towards sustained community-level engagement required for a of 2002 had proposed an increase in health expenditure from 0.9% of the
self-professed social movement. The real tragedy is that toilets are now be- GDP to 2% by 2010 (though it was still far short of the 5% of GDP recom-
ing constructed through orders bullying citizens through refusing ration and mended by WHO). While in actual, as of the 2015-16 budget, it is 1.3% of
electricity supplies, levying fines and withholding payments, if toilets are the GDP. In comparison the NHP 2015 proposes only 2.5% of GDP on
not constructed. grounds of inadequate financial capacity of the country and institutions for
effective utilisation of funds. Thus, while it assures investment in the
idea of a Health Rights Act, it refrains from substantially increasing the
Fig 4.6: SBM Allocations FY 2014-15 and 2015-16
SBM allocations FY 2014-15 and 2015-16 budgetary allocations, making the idea seem impractical and the policy
virtually impossible to implement.
48%
50%
Lack of Focus on the National Health Mission
40%
28%
30% 22% 22% From 0.9% of total GDP, public health expenditures increased to about
1.3%, a marginal shift courtesy of the NHP 2002. Most of these in-
20% 14%
creased allocations went to the National Rural Health Mission (NRHM)
10% 4% 3% 4% (part of the National Health Mission NHM now). The NRHM sought
architectural corrections in Indias public health systems and supports
0% the less-developed states and was widely welcomed. NHM under UPA,
Quarter 1 Quarter 2 Quarter 3 Quarter 4 introduced a host of reforms towards improving access to public health
care but there are still large gaps in healthcare delivery in the country.
% GOI allocation released in FY 2014-15
Instead of building on the gains of the NHM, the financial years 2013-
% GOI allocation released in FY 2015-16 (till February) 14 to 2015-16 have seen stagnation in the Union governments health
spending and the 2016 budget has continued this trend of neglect of the
Source: India Budget, Expenditure Volume II, Format C-6, MODWS sc order health sector. The NHM was an important contribution of the UPA, to-
wards expanding the access to healthcare. Between 2005 and 2014,
4
THE REAL STATE OF THE ECONOMY: 2017
there was an increase in the infrastructural spending. The number of Sub- ter pays lip service to increasing expenditure while doing nothing that can
Centres (SCs), Primary Health Centres (PHCs), and Community Health Cen- alleviate the real problem.
tres (CHCs) increased by 4%, 8%, and 60% respectively. In September
2005, the number of doctors in PHCs was 4 per cent lower than the required A Reasoned Alternative Universal Health Coverage (UHC)
number. As of March 2016, however, the shortfall increased to 13 per cent
out of the required doctors at PHCs. These figures are indicative that this Under this government, Indias healthcare landscape is poised to mimic its
government has starved the NHM of resources and have no resolve to im- Western counterparts, and in all the incorrect ways. At a time when public
prove the NHM.This is despite signals of a serious crisis in the quality of opinion in the UK has forced even Theresa Mays neoliberal government to
primary healthcare, including doctor absenteeism to low effort by the doc- reconsider the many benefits of the NHS, and at a time Americans are dread-
tors to over-medication and maltreatment of patients. ing the repeal of ObamaCare, India would do well to setup a robust public
healthcare system. However, India seems to be adopting the American
Paradigm Shift to Insurance of Universalisation of Healthcare model of insurance-based health care, which has been proved to be a politi-
cal as well as a financial failure, leading to an unhealthy society.
The Rashtriya Swasthya Bima Yojana (RSBY) was launched as a means to
provide social security to workers in the unorganized sector. The health secu- As opposed to this flawed method of providing insurance, an alternative
rity needs of BPL workers and their family members were to be met under widely adopted by many other developing countries both as a developmental
this scheme. RSBY, while important, is certainly not a sufficient way in imperative and the moral obligation of a civilised society, is the UHC. The
which to approach health care provision. What is required is a systematic K. Srinath Reddy report on Universal Health coverage, commissioned in
understanding of its constraints such as the need for regulation as opposed to 2012 by the UPA, provided a roadmap for UHC in India. It focused on citi-
crippling it further. If this continues to be the case, policy experts doubt its zens access to a national health package of essential primary, secondary and
effectiveness in reducing the burden of health expenditure on people, for tertiary care; both inpatient and outpatient. The report also asserted that the
reasons outlined below. services included under UHC must be tax funded and cashless at delivery.
The Argument of Principles Why Provision of Egalitarian Healthcare The report recommends a smooth transformation over time, from the RSBY
must fall within the Domain of the State into a universal system of health entitlements. It endorses building on the
existing capacity and architecture to issue citizens with a National Health
If inadequate investments in health care were not enough, the far more per- Entitlement Card with a minimum amount of disruption. This might be the
turbing trend is the shift in strategy from provision of universal and free best way forward to meet the objectives of both NHM and RSBY.
health services to providing insurance for a few. The eclipsing of the state in
social security signals that the government is gradually washing its hands off Integrated Child Development Services (ICDS):
the responsibility of providing basic services to all, through the veneer of
minimum government. The founding pioneers of our Constitution envi- Do Budget Outlays reveal any change or a Systematic Dismantling?
sioned the governments role in the provision of basic services, as is the
norm in liberal democracies with high rates of social egalitarianism. The Over 40% of our population are children (below the age of 18 years).
governments shift in attitudes is thus antithetical to the legacy that has built Launched in 1975, ICDS aims at providing an integrated package of health,
this nation. supplementary nutrition and educational services to children up to six years
of age, pregnant women and nursing mothers. Its objectives have been to
Increase in Out Of Pocket Expenditure - Study Shows No Significant
Change with Insurance To improve the nutritional and health status of children in the age group of
0-6 years.
Despite regular promotion of insurance-based schemes such as the RSBY
the data from the NSS shows increasing out of pocket expenditure. Even in To lay the foundation for proper psychological, physical and social develop-
states like Chhattisgarh, and Kerala, which are known to have good cover- ment of the child.
age by the RSBY, the effective coverage in rural areas is less than 2 per cent
and in urban areas it is less than 5 per cent. A study of the analysis of NSS To reduce the incidence of mortality, morbidity, malnutrition and school
data from 2014 by Sundararaman and Muraleedharan, from these states dropout.
show that despite considerable effort in pushing for increasing insurance
coverage, the benefits have not reached the poorest and nor is the RSBY To enhance the capability of the mother to look after the normal health and
efficient in providing financial protection. nutritional needs of the child through proper nutrition and health education.
The failure of the government in providing free health services has resulted The objectives were achieved using a package of six services: 1) Supplemen-
in the high burden of out of pocket expenditures on health in the country. As tary Nutrition Programme (SNP), 2) non-formal Pre-School Education
the Finance Minister rightly said, catastrophic expenditures in health are (PSE), 3) nutrition and health education, 4) immunisations, 5) health check-
the topmost reason for pushing people into poverty, with estimates that 60 ups, and 6) referral services.
million people are pushed into poverty each year due to high out of pocket
expenditure. However, the Union Government allocations dropped by 6% from 16,561
crore in FY 2014-15 to 15,502 crore in FY 2015-16. They were further cut
Two-thirds of total health expenditure across India is out-of-pocket. But a by 10 per cent from 15,502 crore in FY 2015-16 to 14,000 crore in FY 2016-
lack of attention to healthcare public or private has very real economic 17. There has been systematic dismantling of the ICDS scheme from 2014-
costs attached to it. 15 onwards, achieved by methods listed below
The RSBY while increasing access has not managed to significantly re- Lack of Wage Revision for ICDS workers
duce out of pocket expenditure. What it has unfortunately led to is the crea-
tion of more opportunities for the private sector to make money out of poor In Uttar Pradesh, ICDS workers launched a protest demanding minimum
peoples illness. Therefore, it is no longer sufficient that the Finance Minis- wages agreement to be implemented and to provide basic infrastructure at
the anganwadi centres. The honorarium of the anganwadi workers has not
5
THE REAL STATE OF THE ECONOMY: 2017
12
13
14
15
16
17
-
-
10
11
12
13
14
15
16
gory wise, but these figures are neither verified independently by the states
20
20
20
20
20
20
20
nor used for assessing the effectiveness of the programme. The practice is so
Source: ICDS portal FY11-FY15, Expenditure Budget Vol II, FY16-17 widely prevalent in all the states, presumably with the connivance of senior
officers, that the overall percentage of severely malnourished children, in
case of 0-3 years according to the data reaching the Union Government from
been raised since 2011. The honorarium of the non-matriculated workers
the states is only 2%, as against 9.4% reported by UNICEF in a recent sur-
was doubled from Rs.1500 in 2008 to Rs.3000 in 2011. However, Rs 3000
vey. The field officials are thus able to escape from any sense of accountabil-
honararium of 2011 is still the same and there is no increase in it even after
ity for reducing malnutrition. Figures from some states show their children
the 7th Pay Commission. Salaries of all categories in the ICDS have been
to be as healthy as in Denmark and Sweden..
erratic, with non-payment stretching for months together. This clearly serves
as a disincentive for even the most dedicated worker to implement the pro-
4.3 EDUCATION
gramme with any degree of seriousness.
Grossly Understaffed Centres This governments disregard for a cohesive educational policy is cause for
worry with both primary education and higher learning, each fraught with
Several supervisor posts are needlessly vacant across the country. In Palwal their own set of challenges. ASER data has shown that despite an increase in
district, against 39 posts of supervisors, there were only 11. In Mewat, one privatisation (in line with the motto of this government shirking responsi-
of the most backward districts, there were only 11 supervisors against 47 bility), there has been no significant increase in learning outcomes. Instead,
posts; in Faridabad district, 27 posts of supervisors were lying vacant. Simi- efforts at strengthening the institutional linkages of primary learning are
larly, there is a shortfall of statistical assistants and accountants. The govern- required.
ment had not made any appointments citing cash crunch.
On the other hand, there is a troublesome attempt to demolish any and all
Contracting of Packed Food credibility of institutions of higher learning, that have built themselves as
centres of reputable teaching and research after years of effort. In institutes
like ICHR, FTII and NMML for example, the tactic employed has been po-
The supply of ready-to-eat foods and food mixes given through ICDS cen-
tres has been replacing locally procured and prepared food for children un-
der five, pregnant women and lactating mothers. It was
pointed out by a group of nutritionists and paediatricians
that severe acute malnutrition was overstated and used as Box 4.2: India and Rising the HIV Epidemic
an excuse to push ready-to-eat food in the form of indus-
trially manufactured products.
India has the 3rd largest HIV epidemic in the world (2.1 million). It sees close to 68,000 fatali-
ties every year from the disease or from related infections. Despite the fatalities and dismal
Although the stress is on providing hot cooked food
track record, the NDA government decided to merge the Department of AIDS Control with the
through anganwadis and self-help groups, the size and
already underfunded National Health Mission in 2014. Then the NACOs budget was cut by a
budget of the scheme make it lucrative to private players.
drastic 22% and asked states to fund the rest (rest assured, barely any of them did). Several
The state gives individual contractors the tender to manu-
experts had warned that this will be a drastic setback for the fight against AIDS and it is prov-
facture the ready-to-eat food mixes. These contracts are
ing to be true.
often huge, ranging between Rs 25 crore and Rs 250
crore, making them prone to corruption. Over time ten-
ders for these contracts have been drawn to favour key India had seen a HIV reduction of over 50% during the UPA government, but with the sudden
players (contractors) and irregularities remain the norm cut in funding, the numbers are slowly shooting up. Modis government, in order to appease the
rather than the exception. growing discontent, decided to dilute the UPAs HIV (Prevention and Protection) Bill and intro-
duce it in the Parliament. Though the Bill criminalizes discrimination against HIV+ individu-
als, it does nothing beyond it. The Bill is symbolic at best, because it has no outlines of policy
An evaluation of ICDS in Gorakhpur by the National
change, funding or even normalisation of HIV+ individuals in society. The regressive, anti-
Human Rights Commission showed that despite Supreme
quated and out-dated ideas of the NDA are slowly threatening to turn the AIDS situation into a
Court orders to provide hot cooked meals, all centres sup-
full-blown health care catastrophe. This was expected from a government whose former health
plied only packaged ready-to-eat food, containing only
minister publicly proclaimed that the way to prevent AIDS is not protected sex, but to abstain
100 calories, as against a norm of 500 calories, and 63%
until after marriage. That one statement undermined decades of work under various govern-
of food and funds were misappropriated. The food being
ments, to prevent the spread of the HIV epidemic.
unpalatable, half of it ends up as cattle feed. People have
6
THE REAL STATE OF THE ECONOMY: 2017
Box 4.3: The Maternity Benefits Programme Rehashing Old Schemes with Poor Design
In a bid to placate public furore post-demonetisation, Prime Minister Modi announced several social security sops that are essentially re-packaging of old
schemes. The Maternity Benefits Programme (MBP) is one such scheme. It promises Rs. 6000 to all pregnant women who undergo institutional deliveries.
It is a reiteration of the National Food Security Mission, 2013 under which universal maternity entitlement is already set at Rs. 6000. In fact, the enactment
of the clause in the National Food Security Act, which mandates that not less than Rs. 6000 should be paid to all pregnant women, would mean a universali-
zation of the scheme called Indira Gandhi Matritva Sahyog Yojana (IGMSY). The IGMSY is a flagship scheme under the Ministry of Women and Child
Development that is currently running in 53 districts, and transfers Rs. 6000 to pregnant women in three conditional installments. To be eligible, the woman
has to be above 19 years of age and benefits are limited to a womans first two live births. Many women are left out of the schemes coverage because of its
guidelines. Therefore, it is imperative that the government should remove any conditionality attached to the scheme for its effectiveness.
Indeed, the NFSA states that it is the right of every pregnant woman with or without conditions to get access to maternity entitlement. It is this framework
that the MBP is currently diluting by implementing a policy that is ill designed in the following ways
The first hurdle that MBP is likely to face is financial. The government antici-
Fig 4.8: IGMSY: Allocation vs Release
pates the number of beneficiaries to be 5.17 million annually, but is unclear how IGMSY:'Alloca-on'vs'Release'
this has been calculated. According to government data, as many as 7.5 million
450 400
women received Janani Suraksha Yojna (JSY) benefits in 2015-16. The number of
400 360
reported beneficiaries of the ICDS supplementary nutrition programme was esti- 343
mated at 19.33 million. This suggests that the number of potential beneficiaries is 350 300
higher than the current calculation. And in the absence of clarity on this 5.17 mil- 300
232 233.5 233
lion number, the programme is likely to result in severe rationing, leading to large 250
exclusion errors. 200
150
Second, the conditions attached to the MBP are likely to create an unwieldy im- 100
plementation structure that will create multiple bottlenecks along the way. Inde- 50 NA
pendent research has shown that funds that are transferred to beneficiary bank ac- 0
counts are slow because of complicated paperwork associated with fulfilling the FY 2013-14 RE FY 2014-15 RE FY 2015-16 RE FY 2016-17 BE
numerous conditions.
Govt Allocation of IGMSY Govt releases for IGMSY
Third, less than half of the pregnant women receive more than four antenatal Source: Budget Document
care assessments or receive supplementary food during pregnancy. Less than a
fourth report consuming iron-folic acid tablets. The MBP lays out no blueprint to
target these most vulnerable groups.
Many have argued that linking the cash transfer to institutional deliveries, in the absence of significant changes in the incentives of health workers, may
not be the best strategy.
These problems can only be truly resolved by making the scheme universal. Estimates suggest that this would cost the government Rs16,000 crore a year,
compared with the current estimate of Rs3,165 crore. Thus while the demonetisation sop is a unique opportunity for this government to take the maternity
health agenda forward, getting the design right is critical.
litically charged nepotism through the insertion of proxy heads. These NDA In order to do this, the National Skill Development Mission would not only
appointees are considerably below standards of their respective peers. It is as consolidate and coordinate skilling efforts, but also expedite decision-
making across sectors to achieve skilling at scale with speed and standards.
though carefully orchestrated surgical strikes have been launched as smear
campaigns against universities like JNU, HCU and Jadavpur, which have However, the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) has fallen
been vocal about their liberal political views, different from those of the short of outcomes. The target was to train 24 lakh people, of which 14 lakh
BJP. were first timers. The remaining 10 lakh were to receive certification for
Recognition of Prior Learning (RPL). Though 20lakhs out of 24 lakh were
Skill India Mission finally trained, an 18% deficiency in target rates is too large to ignore for a
flagship scheme. It is also not clear how many of these trainees found jobs
Reality vs. Targets thereafter.
The Skill India Mission was launched as a flagship programme to create In 2016 alone, the National Skill Development Corporation (NSDC) aims to
train 6.5 million people, nearly
Table 4.3:Trends over time in Learning Outcomes for Arithmetic & Reading
%Children in Std V who can % Children in Std VIII % Children in Std V who can % Children in Std VIII who can
Year do division who can do division read Std II level text read Std II level text
2012 convergence across sectors and 20% States in terms of 45% double the 3.5 million 42% trained in 2015. At this rate, 73%
2014 skill training activities. 21% 40% achieving the 110 million 42% target would require training 72%
2016 21% 40% 42% 70%
Source: ASER 2016
7
THE REAL STATE OF THE ECONOMY: 2017
of 16 million people each year from 2016-2022, four need to be skilling policies that focus on build-
times as many as trained in 2014. The targets of the ing the economic potential of women. Women in India
scheme therefore seem unrealistic. represent only 24 percent of the labour force that is
engaged in any form of work in the market economy,
A Problem Solution Mismatch in Identifying the Importance of Early Educa- compared to an average of 40 percent globally. This number is significantly
tion behind most countries like China and even lags behind regions in Sub-
Saharan Africa and Latin America. The Global Gender Report 2015 by the
According to Economic Survey for 2015-16, World Economic Forum ranked India at 139 out of 145 countries, with
Syria, Pakistan, and Saudi Arabia ranking below it.
25% of the manufacturing workforce has passed secondary school.
Achieving high rates of economic growth is a Herculean challenge without
4% in agriculture has passed primary schooling. the active participation of half the eligible population. Therefore, it is all the
more difficult for India to reap the benefit from the demographic dividend.
52% of the population has only a 10th grade education or less.
Women Face a Larger Brunt of Decrease in Workforce Participation
With such a poorly educated population, it will take a lot to equip people
with the skills they need for the kind of high-growth sector jobs Skill India Adding further stress to an already weak female workforce is demonetisa-
talks about. There is a big mismatch. Skilling and education are not mutu- tion that has affected the vulnerable segments of the labour force most ad-
ally exclusive. They have to sail together. Moreover, poor implementa-
tion of Skill India coupled with cuts to the education budget, the outlook Fig 4.9: Labour Participation Rate (%) (LPR
for Indias much-anticipated demographic dividend is quite bleak. Labour'Par)cipa)on'Rate'(%)'(LPR)''
150
Do Skills Necessarily Translate Into Jobs? versely. This includes
100 mi-
There have been serious concerns that skilling people is not going the
whole hog in an environment where economic growth has been 50
criticised to be 'jobless growth'. A major cause for this can be attributed
to increased automation in factories, as the data from the Annual Survey -
of Industry does indeed indicate a sharp decline in labour-intensive manu- 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 >=65
facturing since 1990-91. Skill India is thus critically dependent on creat- Male Female
grant labour, women,
ing jobs which is a huge challenge in the current economic condition. Source: CMIE
According to the Labour Bureau, which has been surveying eight sectors
of industry since 2009 (textiles/apparel, leather, metals, automobiles, Fig 4.10: Unemployment (%) UER
gems and jewellery, transport, information technology/business process
outsourcing and handloom/powerloom), the number of jobs created by
Fig$
80
these industries is declining: From 6,40,000 in 2009 to 1,17,000 in 2014. 70
60
The decline in the labour force participation rate should put an end to all
50
the talk about the demographic dividend that was supposed to come
40
from the rising share of the working-age group in total population, and
30
the consequent decline in the ratio of dependents to earners. While the
20
share of the young in the working-age population has indeed been rising,
10
theres a decline in the share of the young who are part of the workforce.
Hence, the dependency ratio has been rising instead of falling. Alas, there -
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 >=65
will be no demographic dividend unless the government can change the
Male Female
scenario.
Source: CMIE
8
THE REAL STATE OF THE ECONOMY: 2017
the old. Women have borne a huge brunt of the September-December 2016 the Beti padhao, beti bachao policy in 2015, the percentage of girls enrol-
fall in labour participation. The data is a lot more stressful in this case. Al- ment remained stagnant at 48.20%. Experts doubt its effectiveness in increas-
though labour participation fell in September-December 2016, ing female literacy and supplementing SSA. (Fig. 4.12)
male labour participation increased by 1.4 per cent compared to the May- Removal of the No Detention Policy
August period. However, by the same comparison, female participation fell
by 10.9 per cent. The reversal of UPA policy of No Detention until class 8, which implies
getting held back an academic year or expelled, may lead to large number of
Nearly 8 million women dropped out of the labour force during the last few drop outs from the school, thus defeating the very purpose of the RTE. Amar-
months of 2016.
20000
Sarva Shiksha Abhiyan (SSA)
On August 4, 2009, the Right to Education Act came into effect. The
fundamental right makes elementary education an entitlement for
children in the age group of 6-14 years. The legislation prepares a 10000
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
framework to ensure that children get quality education.
Source: Expenditure Budget
The RTE was welcomed as a 'historical' step forward for the Sarva
Shiksha Abhiyan, aiming to provide a variety of interventions, rang-
Fig 4.12: Drop in School Enrolment Rates
ing from universal access and retention, bridging gender and social
category gaps in elementary education and improving the quality of Enrollment!
learning. SSA interventions include among others, opening of new 13,40,00,000
schools and alternate schooling facilities, construction of schools
13,24,28,440
and additional classrooms, toilets and drinking water, provisioning
for teachers, regular teacher in service training and academic re- 13,20,00,000
source support, free textbooks & uniforms and support for improv- 13,05,01,135
ing learning achievement levels. However, the governments com- 13,00,00,000 12,91,22,784
mitment to the program is doubtful if one assesses it closely, as seen
below:
12,80,00,000
Inadequate Budgetary Outlays
12,60,00,000
Sarva Shiksha Abhiyan, the governments primary mechanism for 2013-14 2014-15 2015-16
implementing RTE, accounts for 69% of the
Source: Elementary Education in india DSIE, 2015-16
total elementary education budget. Since 2014-
15, the government has reduced the allocation in Fig 4.13: Infrastructure Capability in Govt. Schools
SSA from 24,380 crore in FY 2014-15 to 22,500
crore in FY 2016-17.
90.00% 79.90% 80.40% 80%
In 2015, GOI changed the fund-sharing ratio for
Centrally Sponsored Schemes, including SSA. 80.00%
The revised ratios were communicated to state 70.00%
60.00%
governments only in October 2015. As a result of
the delay in determining the fund ratio, both GOI 50.00%
and state governments were slow to release 35.20%
40.00%
funds for the first two quarters of FY 2015-16. 28.50% 27.80%
24.10% 24.50%
Seeing the slow disbursement of funds, advo- 30.00% 21.90%
cates in this field have expressed concerns about 20.00% 10.30% 10.50% 11.20%
the governments commitment towards SSA.
10.00%
9
THE REAL STATE OF THE ECONOMY: 2017
10
THE REAL STATE OF THE ECONOMY: 2017
Transgender Bill Is Passing a Bill Ever Enough? UPA government in 2010 as a framework for planning, allocation and imple-
mentation of sub-plans, has met with changes in the budget processes. The
Despite the passing of the Transgender Persons (Protection of Rights) Bill Jadhav Committee had recommended 16.2% for SCSP and 8.6% for TSP out
by the Lok Sabha, the transgender community is not given the rights to self- of the total planned allocations from the Union budget. However, despite
determine their identity. This is by virtue of not attaining recognition from a clear instructions about the SCSP and TSP allocation and implementation
diverse range of socio-cultural identities and lifestyles. The Bill also does given by the Jadhav guidelines, Ministries/Departments have not followed
away with the crucial caste component that the directives in the previous budget formulations. There is a denial of equita-
acknowledged that caste divisions within the transgender community further ble allocations because of which many of the schemes, which directly bene-
victimises an already vulnerable set of people. Specific ways for trans per- fit SCs and STs, are facing a fund crunch. SCSP-TSP allocations have been
sons to seek justice in the case of discrimination, violence, abuse and a de- routinized, trivialised and converted into statistical-arithmetical post-facto
accounting exercise, which do not make any direct impact to bridge the
nial of rights has not been included in the Bill.
development gap in the conditions of SC/STs.
By excluding either wilfully or out of ignorance the ground realities and
lived experiences of transgender persons, the TG 2016 Bill is perpetuating
the very violence/discrimination it seeks to address, and has negated any Attitude towards Religious Minorities
progress that National Legal Services Authority(NALSA) or Tiruchi Siva
achieved. The Minorities under this government have been pushed back to a time of
greater discrimination, ostracism and violence. The Union Governments
attitude towards the Minorities can be observed by looking at the data from
Through the Lens of Age Senior Citizens
two perspectives, namely: The Ministry of Minority Affairs budgetary out-
lay and the existing social circumstances.
By 2050, around 20 per cent of the population of India will be old. There
were 100.3 million senior citizens (60 and above) in 2011, which is 8.6 per Increasing Instances of Crimes against Dalits
cent of the population. In 2050, there will be 324 million elderly. While harp-
ing about the demographic dividend from every platform, the government
According to National Crime Records Bureau data, 47,064 cases of crimes
has cut our senior citizens a raw deal.
against Dalits were registered last year (2014), up from 39,408 in 2013 and
33,655 in 2012. Media reports are rife with caste-based atrocities committed
National Social Assistance Programme (NSAP) against Dalits. In Una, Gujarat, four Dalit youths, who were skinning a dead
cow were thrashed with iron rods, chained to a car and dragged to a police
Social pension amounts allocated by the Centre to families below poverty station. The assaulters members of the local Gau Rakshak Samiti accused
line are too small to act as a basic and regular source of income. These pay- the Dalit youth of killing the cow for the purpose of selling beef. The grue-
ments cover only half of eligible beneficiaries, and have not been increased some incident was captured on video and widely circulated on social media.
in a decade. In Rajasthan, every day heinous crimes against Dalits are committed. Recent
figures for Rajasthan, the state with the highest rate of atrocities committed
In the middle of the financial year 2014-15, the government slashed social against Dalits, indicate that this violence continues to rise. Between April
sector allocations. Pensions were the worst hit, with a reduction of 30%. The 2015 and March 2016, 617 severe incidents were registered by the Centre
government had announced a budget estimate of Rs 10,546 crore for 2.3 for Dalit Rights (CDR) in Jaipur, the only organization in Rajasthan monitor-
crore beneficiaries in the financial year 2014-15. In January, the government ing these atrocities.
slashed this to Rs 7,187 crore under the revised estimate leaving disadvan-
taged senior citizens high and dry. Alarmingly, there has been no government response to all these reports of
marginalised groups fighting for their democratic and constitutional rights.
Atal Pension Yojana (APY) Instead there is an implicit silence that borders on turning a blind eye to-
wards the Sangh Parivar appointed Gau Rakshak Samitis.
Almost the same trend is seen in the Atal Pension Yojana that was launched
in 2015 and targets the unorganised sector. As of May 2015, only 11% of Through the Lens of Environmental Protection Adivasis and Forest
India's population had any kind of pension scheme. This scheme aimed to
Dwelling Communities
increase that number. However, the typical subscriber of the APY gets a re-
turn of 7.35%, or even 8.44%, (as in the APY), which compares poorly with
Changes have been made to several regulations in a coordinated manner by
the returns of the National Pension Scheme (NPS) funds. The average return
the environment ministry, the tribal affairs ministry and the mines ministry
since financial year (FY) 2010 on the government bond schemes of NPS is
over the period of three years gradually undermining of rights of tribals and
9.09%, on the corporate bond schemes it is 10.65%, and on the equity funds
forest dwelling communities.
it is 13.25%. An average return (of the three fund options) of 10.67% would
give a saver a corpus of Rs.15.81 lakh, almost double of what s/he is cur-
rently getting. The idea behind the APY is to essentially siphon money off Instances of these are many. Consider the Forest Survey of India, which sub-
into annuities provided by insurance companies. Instead of transferring it mitted a report in August 2016 that had calculated based on the govern-
directly to beneficiaries who can then earn from it a much higher interest ments mandate for protection of forests, that over 40% of Indias existing
than what the scheme promises. This is flawed since the beneficiaries of the forest cover should be kept safe from mining of all sorts. The Union Minis-
scheme get the shorter end of the bargain, whilst the profits of private insur- try for environment, forests and climate change has, not yet acted upon the
ance corporations grow. report.
Through the Lens of Caste and Historical Subjugation Dalits and More recently, The Union Ministry of environment, forests and climate
change has constituted an 11-member committee to revamp the Indian For-
Scheduled Tribes
est Act, 1927. Their recommendations included:
Programmes Targeted at Scheduled Castes and Tribes It suggested that forests are to be made more productive and an attempt is
to be made to resolve numerous problems with the forest governance laws.
The directives of Jadhav Committee for implementation of Scheduled Caste
Sub-Plan (SCSP) and Tribal Sub-Plan (TSP) which had been adopted by the
11
THE REAL STATE OF THE ECONOMY: 2017
It contravened the Forest Rights Act and promoted the idea of permitting would be less prone to leakages, provided there are no errors of inclusion
industry to use public forests. and exclusion. However, such programmes should not be started without
adequate preparation or when systems are not in place. The near-universal
It recommended changes in laws that did not adhere to the policy and pro- identification of beneficiaries is possible only if beneficiary lists and PDS
posed a new administrative and legal regime that would hand back manage- are computerised. The all-India average for merging the bank account with
ment control over tribal forests to the bureaucracy, which the FRA disallows. Aadhaar card is only 60%, with less than 30% in states, such as Bihar, As-
sam, Tamil Nadu, etc.
Prime Minister Narendra Modi has regretted that the Compensatory Affores-
tation (CA) Bill could not be passed in the Budget session of Parliament. The third and long-term challenge is of qualitative improvement in food
However, the former Union Minister for the Environment, Jairam Ramesh absorption, especially for women and children, by creating synergies be-
has asserted that the Bill did not respect the rights of people under the Forest tween public health, sanitation, education and agricultural interventions.
Rights Act and gave unbridled control over thousands of crores to the forest Creation of quality rural and urban infrastructure through community partici-
bureaucracy. This disturbing trend has been wreaking havoc with lives of pation, under the above-converged programs, has to be achieved through
thousands of vulnerable groups dependent on forests for survival. effective public-private partnerships in states at the grassroots a crippling
failure that we have not seen thus far.
Through the Lens of Food Security
4.17 CONCLUSION
The National Food Security Act, 2013 (also Right to Food Act) aims to provi-
de subsidised food grains to approximately two thirds of India's 1.2 billion The prospects of social policy look bleak under Prime Minister Narendra
people. It is the umbrella programme providing for the Midday Meal Sche- Modi. Across crucial sectors like health and education, policies lack clear
me, Integrated Child Development Services scheme and the Public Distribu- blueprints for how outlined goals will be achieved. These plans are also
tion System. The NFSA faces three major challenges. grossly underfunded. The Union Governments response to budget cuts
across the social spectrum have come either in form of taking refuge under
The first challenge is to ensure the sustained availability of food grains state federalism or increasingly looking towards options of privatisation of
with public authorities in the wake of the legal right guaranteed to entitled basic human rights. This report has described both of these as inadequate in
beneficiaries. But despite the record food grain production achieved, the creating tangible impact for the people of India, but neither is as disappoint-
lack of marketing and procurement infrastructure in Bihar, Madhya Pradesh ing as the precarious conditions (bordering on plain fear) under which the
and West Bengal has been a cause of distress to the small holding farming most vulnerable sections of our country live today. Vulnerable sections such
community. This issue of leakages has become even more relevant now as as Dalits, women, senior citizens, religious minorities, and tribals are under
the National Food Security Act, 2013 (NFSA) has increased coverage under systematic attack via policies that undermine their constitutional rights and a
PDS to 75% of the rural population and 50% of the urban population. government (backed by the Sangh Parivar) that turns a blind eye to any vio-
lence against them. It is the need of the hour that the leadership acknowl-
The second challenge is to eliminate leakage and corruption and ensure edges that inclusive growth cannot be achieved by paying lip service to em-
stringent monitoring under NFSA at the last mile distribution points (fair powerment while dissing the UPAs progressive social legislations as doles.
price shops) in states. The option of direct cash transfer to the bank accounts We cannot build an India of the future without investing in our citizens.
of the beneficiaries as a substitute for grain has often been suggested, as it
12
13
THE REAL STATE OF THE ECONOMY
Chapter 5
Taxation
An Indirect Attack on Poor Peoples Purses
The quantity and quality of tax revenues collected by the government are see how GST will be the game-changer that it is supposed to be since over-
often true indicators of the robustness of an economy. Indias tax-GDP ratio all tax rates in the country will remain high.
went from 6% in 1950 to 16% in 1990. Between 1990 and 2014, as India
became rapidly wealthy with a five-fold increase in per capita GDP, the tax- The arbitrary slab structure of varying values has met with harsh criticism
GDP ratio actually remained stagnant between 15-17%. from subject experts:
Tax revenues since 2014 have grown at an average of 12.5% per annum. The proposed tax rates of 6% and 26% are avoidable. The 6% rate seems
This is nothing extraordinary. The average tax revenue growth from 2009 to to be due to the fact that almost 300 items are exempt in the Union excise
2014 was 15%, despite the global financial crisis of 2008-09. Viewed in that duty and the government does not want to tax them at 12% suddenly. This
context, the 12.5% growth in tax revenues is by no means robust. will however, create a problem as the states are levying the VAT on some of
these items at 5%. The Union government could have pruned its exemption
Taxes are collected in two categories direct taxes (tax on income and list in the last budget itself so that they could have been taxed at the merit
wealth) and indirect taxes (tax on products and services). Majority of direct rate of 12% when the GST is levied.
taxes are levied by the Central government while States depend on indirect
taxes such as sales tax for their revenues. A measure of the ratio of direct There is no rationale for having a super rate of 26% either. This comes
and indirect taxes of a nation is an indicator of the quality of tax revenues. from the recommendation of the Chief Economic Advisors Committee
which seems unsure of its calculations on revenue neutrality with 18% stan-
Direct taxes are considered progressive, typically impacting the wealthy dard rate and provides an additional rate category. With consumer durables
elite and the earning middle class. Indirect taxes are regressive in nature and included in this category, it will create a lot of administrative and compli-
their marginal impact is much greater on the poor than the rich. Indias ance problems.
direct-indirect tax ratio is 35:65, collecting twice as much in indirect taxes
than in direct taxes. This is a sharply skewed structure, placing a greater Since the basic principle of GST is to provide input tax credit, there is no
relative burden on the poor. In the absence of a wealth tax and dividend tax, reason for levying a lower rate. Taxing inputs at lower rates provides incen-
it is not surprising that Indias direct taxes ratio to GDP at 5-6% is one of the tives to evade the tax on the final products by suppressing the value of out-
lowest among large economies. India has a peculiar mix of low tax-GDP put.
ratio, with larger collections through indirect taxes.
The population question: The previous tax regime benefited states with
large industrial bases, as excise duty was levied by the producing state. GST
The multiplicity of rates in the proposed GST structure is clearly retro- 12% is the standard concessional rate of tax.
grade as it will increase the administrative complexities and compliance
cost. Rather than moving towards neutrality, this reform will increase 5% rate includes goods of mass consumption such as essential commodities.
distortions. The fundamentals of sound taxation reform are being vio-
lated, as GST with a higher number of rates is one step forward and two Those with nil tax include about 50% goods in the consumer price index:
steps backwards. food grains, essential medicines, fruits, vegetables
While the cess is supposed to be temporary, partly to fund the compensa- No specific rate has been prescribed for services: the rate may increase to
tion to states for a period of five years, Indias history suggests that it is 18% from 15%.
difficult to get rid of cesses. If that turns out to be correct, it is difficult to
1
THE REAL STATE OF THE ECONOMY
will change that as it will 5.5 Taxation Story: Excise Hides More Than It
be levied at the point of consumption, and not production. Thus, prima fa- Reveals
cie, it will tilt the balance in favour of states with higher population and
consumption, even if they do not have a large industrial base.
Most nations in the OECD follow a rough 65:35 split between direct and
indirect taxes, i.e. 65% of their tax revenues are from direct taxes. Indias
Easy escape route: the Centre and states have decided to water down direct to indirect tax ratio for all tax revenues of the Centre and states com-
the penal provisions to ensure that a trader gets immediate bail if the bined is exactly the opposite of OECD nations - 35:65. Is there a desired
alleged tax evasion is up to Rs 2 crore. balance between direct and indirect taxes for an economy?
On the plus side, with uniform GST eliminating a host of taxes, seam-
less interstate trade will boost GDP. Capital goods prices will start to
come down as firms start getting input credit for taxes. The system is
also more likely to lead to a transparent system of tax collection as it
continues to nudge the informal economy towards a more formal one.
GST is best brought in when the economy is thriving; you dont create
a compression and then implement it says R Kavita Rao of the Na-
tional Institute of Public Finance and Policy (NIPFP). The slowdown in
the economy will mean lower state revenues, which then requires the
centre to transfer more funds to states to ensure revenue neutrality. This
was explained by West Bengal Finance Minister Amit Mitra: Tsunami
of demonetisation has led to everyones compensation going up. Last
December our tax collection grew by 11% and this year tax collection
stood at a negative 2% due to demonetization.
2
THE REAL STATE OF THE ECONOMY
May-15
May-16
Jul-14
Jul-15
Jul-16
Mar-15
Mar-16
Sep-14
Sep-15
Sep-16
Nov-14
Nov-15
Nov-16
Apr-14
Aug-14
Oct-14
Dec-14
Apr-15
Aug-15
Oct-15
Dec-15
Apr-16
Aug-16
Oct-16
Dec-16
Jun-14
Jun-15
Jun-16
Jan-15
Jan-16
Feb-15
Feb-16
Oil prices have a tremendous trickle-down effect on Indias economy, as A cess is usually an additional tax in India that is levied by the Central gov-
India is a heavy oil dependent economy. This drop in global oil prices should ernment to raise funds for a specific purpose. The revenue from a cess is not
have ideally yielded nearly $50-75 billion in annual savings for the Indian shared with the states but is instead retained by the centre. The government
government, since India imports roughly 200 million metric tonnes of crude has frequently used this form of taxation as and when convenient, using it as
oil every year for the last two years. a form of revenue it does not have to share. The Comptroller and Auditor
General of India (CAG) has pointed out how there is inadequate transpar-
Low oil prices should translate into low inflation, huge current account sav- ency on the manner in which such money is spent.
ings and a boost to the overall fiscal situation. With such healthy mac-
roeconomic indicators, had lower oil prices been passed on to industry and More than Rs. 1.4 lakh crores have been collected by the central government
consumers, it would have helped revive sagging private investment and con- under various cesses for purposes ranging from higher education to Swachh
sumer demand. Instead the Modi government chose to levy excise duties on Bharat. Cesses go against the spirit of cooperative federalism as they are not
petrol and diesel, denying pass through of such lower prices. Shockingly, shared with states. Further, many of these funds have not been utilized at
the government increased excise duties on seven occasions over the last two all. The use of cesses reflects poorly on the governments macroeconomic
years. Duties on petrol have doubled in the last two years while those on management. It clearly signals that this is a government that uses non-
diesel have nearly tripled. Notwithstanding all the established wisdom of preferred avenues to meet critical targets.
4
THE REAL STATE OF THE ECONOMY: 2017
Chapter 6
The government introduced the Pratyaksh Hanstantrit Labh Yojana (PA- However, the biggest problem in reforming subsidy delivery has been the
HAL (Direct Benefit Transfer for LPG Scheme) for transferring the subsidy faulty design and implementation of the Pradhan Mantri Jan Dhan Yojana
on LPG directly to the consumers on 15 November 2014 in 54 districts (1st (PMJDY) which is critical for the success of DBT.
Phase) and in the remaining 622 districts on 1 January 2015 (2nd phase).
The government began paying subsidy directly into bank accounts of cook-
80000 70.00%
73481.19
66.44%
70000 60.00%
60000
50.00%
50000 46000.04
40.00%
40000
30564.6 30.00%
30000
21257.56
13.31% 20.00%
20000 13305.9
9782.6 5.27% 4.53%
10000 9.58% 10.00%
2036.18 2877.27
701.79 130.45
0 0.00%
MGNREGS NSAP PAHAL SCHOLARSHIP SCHEME OTHERS
Total Funds Transferred Funds Transferred Through Aadhar Payment Bridge % Fund Transferred
1
THE REAL STATE OF THE ECONOMY: 2017
Religious reasons
Lack of trust
Cited&as&only&reason& Cited&with&others&reasons&
Source: Global Findex database
The PMJDY rested on six pillars and was to be rolled out in two phases.
6.2 PRADHAN MANTRI JAN DHAN YOJANA
The six pillars were:
The PMJDY was launched with much fanfare and pitched as a new initia- Universal access to banking services
tive to ensure financial inclusion. While the objectives are noble, they are
not new, in contrast to the governments publicity blitzkrieg. It appears to
o Each district to have a sub-service area covering 1,000 to 1,500 house-
have been implemented with the sole mission to break records, without
holds
incorporating mistakes from the past, thus leading it to being marred by
inconsistencies which have blunted its efficacy.
o Banking service to be available within a reasonable distance of about 5
kilometre radius.
Opening Accounts without Adequate Infrastructure
Providing basic banking accounts with overdraft facilities and a Ru-Pay
Existence of physical infrastructure becomes crucial to achieve the objec-
debit card
tive of financial inclusion. A global survey shows that apart from problems
with documentation and cost of maintaining accounts, absence of financial
Financial Literacy Programme
institutions in the near vicinity is a prime reason for financial exclusion.
Creation of a Credit Guarantee Fund
The UPA Government focused on enhancing infrastructure by creating con-
ditions and guidelines for banks to open bank branches in unbanked re-
Providing Micro insurance
gions. The Reserve Bank of India has encouraged the setting up of special-
ised banks like the small finance banks and payment banks to facilitate
Providing unorganised sector pension scheme
financial inclusion. These have helped create the enabling environment for
addressing access to formal institutions at the client level. Once such bank-
PMJDY: A Slow Start in Phase 1
ing infrastructure is in place, programmes like PMJDY can be pushed in
mission mode.
PMJDY expanded its rollout based on the existing infrastructure already
Extending Swabhimaan to PMJDY created by the Swabhimaan programme. It paid some attention to ultra-
small branches as a last-mile touch point and left the rest for the banking
system to take care of. The trajectory for the latter had been laid out by the
In 2011, the UPA government launched Swabhimaan, mandating banks to
RBI: Villages having more than 1,000 population were to be provided bank-
open an outlet in every village with a population of over 2,000 by March
ing outlets.
2012, and to utilize banking correspondents to reach out to neighbouring
villages. It mandated that 25% of the branches opened during a financial
year had to be in unbanked rural areas. The plan led to banks opening out- Phase I of the PMJDY was not very successful. Despite the opening of ac-
lets in nearly 99.7 per cent of the target villages. This policy focused on the counts, the presence of a large number of zero balance accounts raised ques-
physical infrastructure and touch points. tions about their usage. About 84.5 million accounts of a total of 125.5
million new accounts opened (67%), had zero balance.
The PMJDY took the UPA governments Swabhimaan approach to the next
level by focusing on ensuring that every individual gets a bank account. Problems in the PMJDY Approach - Excluding the Poor Mans Banks
The PMJDY set targets and embarked on its agenda on a mission mode
with real time monitoring (and launched a media blitzkrieg to highlight its PMJDY has failed to leverage and appreciate the opportunities already
achievements). available. This is exhibited by its ignoring the potential of regional rural
banks (RRBs). While RRBs represent around 31% of the rural branch net
2
THE REAL STATE OF THE ECONOMY: 2017
work, their facilities due to insufficient infrastructure of ATM and PoS devices. Only
contribution to opening the PMJDY accounts was a meagre 23.92 %. The 78% of the PMJDY accounts were issued Ru-Pay cards and since a substan-
contribution of RRBs becomes even more insignificant if we take the data tial number were zero balance accounts, the cards were rendered useless.
for all accounts (rural and urban combined) as a proportion of total PMJDY
accounts. Enrollment Strategy- Encouraging Duplication
Despite the immense penetration of postal network and co-operative system, Swabhimaan led to the opening of Basic Savings Bank Deposit (BSBD) as a
and the fact that the majority of rural population relies on these networks for means to include the unbanked populace into the institutional banking sys-
their banking requirements, the rollout of PMJDY was bank led. Even in the tem. PMJDY renamed these existing accounts while adding some new fea-
scheme of withdrawal of specified bank notes post demonetisation, the peo- tures such as debit card, overdraft facilities and insurance cover. However,
ples institution cooperatives were left out as the programme was centred the scheme was publicised as a new scheme leading people to open new
around commercial banks. accounts despite already having a BSBD accounts, thereby leading to dupli-
cation. It was estimated that among the first 50 million accounts that were
Ru-Pay cards was an additional feture of the PMJDY. It too remained a com- opened 20% of the accounts were not exclusive accounts.
mercial bank-centric feature. RRBs could have been integral to success of
this program after having completed their integration with the core banking Direct benefit transfer of LPG (DBTL) required seeding of Aadhar numbers
system but they lacked the required infrastructure for ATMs and the card with the bank accounts. There was a directive that accounts under PMJDY
acceptance network. Further, the absence of sufficient branch infrastructure be opened even if the household already has a bank account, particularly if
has limited their abilities to activate the RuPay cards and has limited the the PMJDY account for the household was in the name other than that of
options for card usage. LPG subscriber. Since the PMJDY tried to use household as a unit of analy-
sis, this initiative resulted in multiple accounts in a single household. A
Usage of Ru-Pay cards were incentivised by the insurance cover of Rs. study by MicroSave indicated that 33% of the accounts opened under
100,000 for the card holder, if the card was swiped at least once in 90 days. PMJDY belonged to people who already had a BSBD account and 31% of
This incentive proved futile as customers in rural areas could not avail of the
such customers actively use their alternate account. Moreover, Government
failed to dispel misconceptions that PMJDY account is a must to avail of
government benefits or the false expectation of receiving free money (over-
draft) in bank accounts.
Table 6.4 Reasons behind Multiple Accounts
PMJDYs sole focus on opening new accounts over-
1 To receive benefits under PMJDY scheme 84% looked the need to increase their usage or keep them
2 Everyone else in the village was opening PMJDY account, so followed suit 8% functional. About 25% of all the accounts are still
zero balance accounts. As per the MicroSave study,
3 Forced by bank official to open account 4% there is a decrease in bank account dormancy from
4 In expectation of receiving overdraft money in my account 3% 43% in 2014 to 28% in 2015, owing to increased di-
rect subsidy transfers (government social security
5 Others 1% payments) to PMJDY accounts under various govern-
Source: (PMJDY) WAVE III Assessment by Manoj Sharma, Anurodh Giri and Sakshi Chadha
ment schemes. Such high levels of customer dor-
3
THE REAL STATE OF THE ECONOMY: 2017
Closure of 4 million PMJDY Accounts amid the Demonetisation Chaos facility, the average borrowing is only around Rs.1,320 per account as
against the offered Rs. 5,000 with the PMJDY scheme.
PMJDY account came as a saviour after demonetisation to make the economy Closure of 4 million PMJDY accounts amid the Demonetisation chaos
less dependent on cash. However, there has been a bizarre development
wherein over four million PMJDY accounts, have been closed (including both Insufficient Aadhar linkage
private and public sector banks) and the authorities have failed to explain this.
Between Nov. 30 and Dec. 28, 2016, some 4,567,107 such accounts were The government is counting on Aadhar as the vehicle of financial inclu-
closed across five banks; as per the PMJDY data shows. sion. However, the progress has been dismal with only 57.6 % PMJDY
accounts having been Aadhar seeded till now. With the government practi-
Table 6.5: Closure of 4 Million PMJDY Accounts due to Demonetisation
Bank Nov-16 Dec-16 Difference
cally making Aadhar compulsory for subsidy and welfare schemes in an
incremental manner, this raises serious possibilities of exclusion.
UCO Bank 76,53,413 54,37,436 -22,15,977
Canara Bank 77,69,692 62,45,707 -15,23,985 The number of beneficiaries under DBT schemes stood at 32.59 crore in
State Bank of India (RRB*) 79,04,265 72,82,588 -6,21,677 December out of which 25.43 crore accounts were Aadhar-linked. While
Axis Bank 6,36,287 4,93,032 -1,43,255 the Aadhar linkage is with 78% of the DBT accounts, only 29.78% of the
payments happened using the Aadhar bridge, indicating that there is much
J&K Bank 12,63,395 12,01,182 -62,213
ground to be covered.
mancy can be attributed to reasons such as lack of customer awareness (mis- 6.12 Conclusion
conception that PMJDY account is a must to avail any government benefits),
customers intent not to miss the PMJDY bandwagon, and false expectation The PMJDY is the critical pipeline required for DBT to be more effective.
of receiving free However, while striving to aggressively achieve the targets of opening bank
accounts in the small window of August 2014 to January 2015, the PMJDY
Ru-Pay Cards ignored already existing infrastructure which could have better helped it
achieve its goals. Further, its inept implementation led to the duplication of
Government has failed to make RuPay cards an effective vehicle of the finan- accounts. The governments sole focus on creating records e.g., opening of
cial inclusion architecture. This has disastrous consequences in the frenzy to the largest number of accounts on a single day ensured that it lost an oppor-
push towards a cashless economy. As of November 2016, 300 million Ru- tunity to meaningfully achieve the agenda of financial inclusion. The design
Pay cards were issued, of which 195 million were associated with PMJDY flaws of PMJDY were still being corrected when the government unleashed
accounts. This forms 65% of the cards issued and it can be assumed that the shock of demonetisation, adding to the challenges faced by account hold-
most of them were issued to first time users. As argued above, a large por- ers and making a tough situation even worse.
tion of the PMJDY cards are dormant. The MicroSave study found that 80%
of the customers rated Bank Mitras (banking correspondents) as their first
preference for conducting transactions, as against ATMs and bank branches. Table 6.6: Report on OVERDRAFT (Sanctioned/Disbursed) under PMJDY
- December 2016
The risks and failures associated with using a RuPay card also demotivates
PMJDY customers from keeping their RuPay card active. Total number of PMJDY accounts 262019458
Overdraft (OD) facility was sold as a big incentive for opening the PMJDY
accounts. In fact, as the MicroSave study shows, it was instrumental in forc-
ing people to open new accounts despite already existing accounts. The OD
facility was envisaged as an exigency fund for the borrowers who were
mostly the poor segment. However, the scheme has failed to achieve its ob-
jectives. Only 3.19% were offered an OD facility and 0.93 per cent of
PMJDY account holders availed the facility. Low offtake of OD facility is
either due to their low usage or the problems related to Aadhar seeding. Ei-
ther way, it indicates the failure of the scheme to achieve inclusion in its true
sense. Even with the small number of accounts that have availed the OD
4
THE REAL STATE OF THE ECONOMY
Chapter 8
Demonetisation
War on Black Money or War on the Poor?
On November 8th, 2016, the Government of India withdrew the legal tender ernment expected that SBN worth Rs. 4 to 5 lakh crores would be rendered
status of currency notes issued by the Reserve Bank of India (RBI) bearing worthless on account of not being deposited.
the denominations of Rs.500 & Rs. 1,000, hereafter referred to as the Spe-
cific Bank Notes (SBN). The Notification putting demonetisation into ef- The RBI is yet to publish information relating to the number of SBN that
fect allowed individuals and institutions holding SBN to tender them at any have been returned to the banking system. The last official release of the
office of the Reserve Bank or any commercial bank branch and obtain a RBI on December 10th, 2016 mentioned that an amount of 12.44 lakh
credit of an equivalent value in their bank accounts on or before December crores, which formed 80% of the all SBN in circulation had been thus re-
30th, 2016. It also allowed individuals to make restricted withdrawals from turned. It has been widely reported that, by the end of December, around
their bank account. 95% to 97% of the SBN in circulation have reached the banking system.
Indians abroad and the Central banks of Nepal and Bhutan, which hold
OBJECTIVES some of their foreign exchange reserves in Indian currency, hold a part of
the remaining notes. The actual value of SBN rendered worthless will be
In the course of his address to the nation while announcing the demonetisa- known only after June 31, 2017, which is the deadline for Non Resident
tion, Prime Minister Modi indicated that, through this move, he aimed to Indians to exchange SBN held by them at specified offices of the RBI. How-
target black money, fake currency and terror financing, and remove them ever, it already appears to be clear that only 2-3% of the demonetised SBN
from circulation. Unaccounted wealth held in cash form or wealth generated will remain un-deposited, indicating unequivocally, that the demonetisation
by evading taxes, i.e., black money, was the primary target of the demoneti- exercise has failed to achieve its primary objective of cleansing the econ-
sation exercise. omy.
The government appears to have calculated that holders of black money Counterfeit Currency
would not deposit these currency notes into their bank accounts out of fear
of corruption and taxation laws. Thus, the value of SBN not received into When a particular series (and design) of currency is withdrawn, those who
bank accounts would indicate the approximate value of notes held within the were printing such counterfeit notes would find their efforts rendered worth-
economy as black money. The rendering of these currency notes as worth- less. For instance, when the RBI announced that the currency notes printed
less would extinguish part of the RBIs liabilities and enable it to provide a before the year 2005 would be withdrawn in 2014, printing facilities for
windfall dividend to the government. Thus, demonetisation may be con- counterfeit notes belonging to older series of notes were rendered redundant.
ceived as a one-time tax on black money, at a rate of 100%. It is important Demonetisation is not a necessary exercise to achieve such objectives, and
to note that demonetisation only targeted current stocks of black money, but the governments exercise of it displays considerable overbreadth.
failed to provide any solutions to counter black money accumulation in the
future. Counterfeiting is a global issue, and impacts most major currencies. It is
likely that counterfeit bills of our freshly designed currency notes will soon
The text of the notification mentioned that fake currency notes have been be in circulation. This can, however, be prevented by strong security fea-
largely in circulation and is causing adverse effect to the economy. The tures enmeshed with the design. It seems that the government has missed the
notification implies that a large number of counterfeit notes are in circula- opportunity of ensuring the adoption of such security features in the new Rs.
tion. The governments intention was to render such SBN worthless. Sec- 500 and Rs. 2000 currency notes it launched post-demonetisation. This indi-
ond, the Notification mentions that fake currency is being used for financing cates a lack of foresight and inadequate planning on the governments part.
subversive activities such as drug trafficking and terrorism. Demonetisation It remains to be seen whether and when such changes will be incorporated
would ensure that those indulging in these subversive activities would be into newer currency notes.
dealt at least a one-time blow.
A study conducted by Indian Statistical Institute (ISI), Kolkata under the
Gaps between Expected and Real Outcomes supervision of National Investigation Agency (NIA), estimated that the
value of Fake Indian Currency Note (FICN) in circulation was about
This section compares the intended effect of the demonetisation with actual Rs. 400 crores, which amounted to roughly 0.03% of the currency with-
results, with respect to impacts on black money and counterfeit currency. drawn. It also indicated that the ability of banks to prevent counterfeit notes
being deposited was limited since their machines often fail to identify fake
notes. Usually, it requires some manual effort by the teller to identify fake
Black money
notes. This step is time-consuming and may have been overlooked due to
the astronomically high level of deposit activity in the 50-day window pe-
Various agencies had initially estimated that around 25% to 35% of the SBN
riod. This indicates that some fake currency notes have slipped through into
would not be deposited by the stipulated dates. On November 23rd, 2016,
the banking system and become legitimised. Thus, the impact of demonetisa-
the Attorney General of India told the Supreme Court of India that the gov-
tion on fake currency in circulation remains unclear and questionable.
1
THE REAL STATE OF THE ECONOMY
Terror Financing
The government claimed that fake currency is more prevalent among the
SBN, and that such fake notes facilitate terrorism and drug trafficking.
Thus the increase in absolute levels of high-denomination notes aids
terrorist and subversive activities.
But empirical evidence collated from data on terrorist strikes and fatali-
ties from the Global Terrorism database and the South Asian Terrorism
portal shows that it is very difficult to establish a causal relationship be-
tween the number of terrorist strikes on Indian soil and the absolute lev-
els of currency in circulation.
First, the government seems to have incorrectly assumed that Table 8.1:Value
of Assets Seized
a large part of the unaccounted wealth was in cash. In May (in Rs. Crores)
2012, the Finance Ministry released a White Paper on Black
Year Cash Jewel Other assets Total Income % of
Money, where it asserted that cash was the least preferred admitted cash
instrument for storing unaccounted wealth. A large propor- FY 07 187 99 78 3613 5.20%
tion of the unaccounted wealth of Indians is held in the alter- FY 08 206 128 93 4161 5.00%
native forms of jewelry, real estate, and foreign currency. FY 09 340 122 88 4613 7.40%
FY 10 301 132 530 8101 3.70%
Secondly, a large part of the unaccounted wealth held in cash FY 11 440 184 151 10649 4.10%
could have been laundered back to the banking system FY 12 500 271 134 9289 5.40%
through means including, but not limited to, benami transac-
tions, back dated sales, income tax exemption for agriculture Source:White Paper
Expected Costs of Demonetisation governor told a parliamentary standing committee on finance on 18th, Janu-
ary, 2017 that the central bank had infused new currency notes worth
around Rs 9.2 lakh crores into the system, approximately 60% of the cur-
Demonetisation is seldom used to weed out black money because of the
rency withdrawn.
huge cost associated with the policy instrument. Being a blunt instrument,
when used, it entails higher policy risks and creates a high level of eco-
However, the reserve money numbers released by RBI on January 13th,
nomic uncertainty, thereby imposing large burdens on individuals, firms
2017, showed that the currency in circulation (CIC) was Rs 9.5 lakh crores,
and the government.
including the non-demonetised low de-nomination notes worth Rs 2.53
lakh crores. If the CIC number were to be adjusted for the notes already in
In the short term, the impact takes the form of sales losses for firms, tax
circulation, the addition to the stock of currency (replacement of banned
losses for the government and employment losses for the unskilled and the
notes) works out to Rs 6.97 lakh crore. A SBI report adds that going by the
semiskilled. In the medium term, the impact lies on investments and the
official CIC number, 70% of remonetisation would be completed by Febru-
creation of jobs.
ary end. The problems of the slow pace of replacement are aggravated by
the fact that currency notes of Rs. 2000 are an inadequate medium of ex-
Economic costs often translate into human costs, and it has been reported change because of the difficulty of finding change for them until the other
that by 22 December, 2016, 105 people had lost their lives due to chal- denominations are substantially remonetised.
lenges posed by drive of the demonetisation.
On a 2-shift basis, the printing capacity of all 4-currency presses in India is
Impact on economic growth 66.90 million/day. On November 8th, 2016, 17,165 million pieces of
Rs.500 and 6858 million pieces of Rs.1000 were withdrawn. On a note-to-
Since the demonetisation, in effect, has created an acute liquidity crisis, the note basis, replacement would take 359 days. If the new Rs. 500 notes &
two most important factors that determine the impact on growth in Finan- Rs. 2000 notes replace old Rs. 1000 notes and Rs. 500 notes, this can be
cial Year 2016-17, would be rate of infusion of new currency notes into the completed in 307 days. Thus, the replacement of currency is likely to be
economy, and the availability of alternatives such as secure digital payment completed only in the Financial Year 2017-18.
systems.
Digital payments
Remonetisation
The situation appears to have been compounded by the inefficiency of digi-
A lower rate of infusing new currency notes into the economy would result tal payment platforms, which were promoted as an alternative to cash trans-
in more palpable impacts on Indias gross domestic product. In the first 30 actions. In October, 2016, Rob Reeg, the CEO of MasterCard, stated that a
days after demonetisation, the infusion of additional currency by the RBI substantial 95% of all transactions in India are cash-based. This compares
was Rs.4.61 lakh crores, roughly 30% of currency withdrawn. The RBI poorly with statistics from other countries, which are less dependent on
2
THE REAL STATE OF THE ECONOMY
In a liquidity crisis such as this, at the first level, sales get dis-
rupted, leading to a reduction in the accrual of indirect taxes.
The second order effect is a reduction in profits generated by
the firms. Assuming other costs to be same, lower revenue with
a fixed cost would reduce profits, thereby impacting the direct
cash. Weak digital infrastructure and low digital literacy among Indian citi- tax accrual. In addition to taxes, other sources of revenue of governments,
zens result in low adoption levels. Further, the shortcomings of Indias data- both Central and the states, will be impacted.
protection framework for digital transactions, and flailing cyber security
among banks pose strong dangers for the adoption of digital payment sys- In this section, possible gains and losses for the Central and State govern-
tems. ments have been considered.
In terms of value, a CLSA report puts the number closer to 68%, as shown in Central government
the graph above.
Gains: Gains to the Central government may accrue in two possible forms.
Impact on GDP FY16-17 This could be by way of an increase in personal income tax collection and
possibly, by a dividend from RBI if the liability extinguished is significantly
The withdrawal of 86% of the currency in a cash-dependent economy like higher than cost of replacing currency. But as time progresses it is increas-
India considerably dampens demand. As production decreases, the demand ingly clear that neither of these scenarios is plausible. We already know that
for labour comes down, leading to a vicious cycle of low demand for labour, almost 97% of the demonetised currency is back. Further, CMIE has esti-
lower incomes and low consumption expenditure. mated that the transaction cost during the 50-day window till December
30th, 2016 would be Rs. 1.28 lakh crores. Therefore, the only possible long-
After demonetisation, multiple institutions have revised their GDP estimates term gain would lie in the reduction of the Central governments interest
for India. The graph below provides a snapshot of various estimates. To put burden.
it in perspective, a 1% loss in GDP would translate roughly into a loss of
Rs.1.5 lakh crores. In the latest estimates, The IMF has slashed Indias Loss: The indirect tax accrual to the Central government, primarily excise
growth forecast from 7.6% to 6.6% for 2016-17 after the note ban. duty and service tax, is likely to take a hit in the medium term. Apart from
taxes, there are two other
sources of revenue that may be
impacted. First, the dividend
and profits received by the cen-
tral government is likely come
down for the current financial
year. Secondly, other sources of
revenue like toll collection in
national highway, revenue of
Indian railways, revenue genera-
tion in tourist destinations, etc.,
are likely be detrimentally im-
pacted.
State governments
3
THE REAL STATE OF THE ECONOMY
Loss: Losses would primarily be on account of sales tax (VAT) and stamp Most farmers receive direct credit for farm inputs from cooperative banks
duty accrual. In addition to such taxes, the impact on other sources of reve- and Primary Agriculture Cooperative Societies (PACS). These are the institu-
nue would be similar to what is experienced by the Central government. tions through which they operate their Kisan credit cards. However, the new
Dividend and profits received by the state government, revenue like toll col- rules after demonetisation did not allow farmers to deposit money into their
lection in state highway and revenue generation in tourist spots and other own accounts. However, they continued to be charged interest by the bank
similar revenue accounts may also suffer negative consequences. for the loans they availed. This will eventually lead to the collapse of the co-
operative banks, as they would fail to recover the loans. Further, this being
Tax collection the sowing season, Primary Agricultural Cooperative Societies (PACS)
stores are filled with fertilisers. PACS will be unable to supply fertilisers to
Accrual of indirect taxes depends on the amount of economic transactions farmers, as per rules, because of unpaid loans from the past.
taking place in the formal economy. In a press release dated Jan 09, 2017,
the Central Government reported that the indirect tax collections posted a By disallowing co-operative banks from depositing, exchanging and with-
robust 25 % year-on-year (YoY) increase for the period April-December drawing old currency from its customers, the government has engineered a
2016. For excise duty, the growth was 43% and for service tax it was 24%. systematic failure of the entire co-operative sector that forms the backbone
of the rural economy. The RBI stopped all the 370 central district co- opera-
Considering the fact that tax rates have increased between the periods com- tives and 93,000 primary agricultural credit societies from participating in
pared, an accurate picture can be only be obtained after stripping the in- the exchange and deposit of old notes. This has affected their operations
crease of tax collection on account of increase in tax rates from the overall comprehensively. As per RBI data, cooperative banks had Rs. 2,36,980
indirect tax collections. A study by Suyash Rai, of the National Institute for crores while PACS have Rs. 81,900 crores as deposits. This signifies their
Public Finance and Policy (NIPFP), shows that after demonetisation, growth importance in a rural economy.
in tax collection has actually slowed down considerably.
Table 8.2: Growth in Excise Duty & Service Tax Cooperative banks are still critical
for last mile in rural India. This
Growth in excise duty Apr - Oct Nov Dec will continue for at least the next
decade, till larger or more formal-
Normal growth 45% 33.70% 34.80%
ized financial institutions take firm
hold in rural India. Despite all
Adjusted growth 4.20% 0% NA
their negatives, these institutions
are known to offer easier loan and
deposit products and hence fa-
Growth in service tax Apr - Oct Nov Dec
vored by the poor.
Normal growth 26.90% 16% 3.70%
The Reserve Bank of Indias
Adjusted growth 17.10% 10.00% 0.20% (RBI) decision to keep cooperative
banks out of the demonetisation
4
THE REAL STATE OF THE ECONOMY
scheme has hit dairy farmers hard in Karnataka. Majority of the farmers in pensions are being credited into bank accounts, thus putting socially and
the state have not been able to access money earned through supplying milk economically challenged people with limited access to urban and semi
to the cooperative societies. About 60% of the total 8.5 lakh dairy farmers urban banks in severe distress, as they do not have a viable channel to with-
have their bank accounts in cooperative banks. The village-level milk pro- draw this amount.
ducers cooperative societies deposited money towards the supply of milk to
the farmers accounts, but the farmers have not been able to withdraw The problem is larger than just easing out liquidity in the economy, it is also
money due to the RBI regulation. about tackling lack of purchasing power, reflecting the adverse effect of the
recession on employment and incomes. And clearly, the non-inclusion of
The tale is no different for industries from all over the country, be it the agri- cooperatives that act as lifeline of the informal economy has only paralyzed
culture in Punjab and Maharashtra, the beedi units in Jangipur, West Bengal the system than empower it towards a cashless economy as promised by the
or the fishermen of Tanjavur, Tamil Nadu. Everyone is crippled by the cash government.
shortage; leaving thousands who occupy the lower rungs of the informal
economy, the most vulnerable, with no income. In the rare chance that a Informal sector
labourer gets paid, the utility of the new 2000 rupee note in a rural village is
as similar as that of the demonetised notes; unusable due to the cash crunch. A significant proportion of the poor, both rural as well as urban, is employed
in the informal sector. The All India Manufacturers' Organisation (AIMO),
Demonetisation has led to an implosion of agricultural trade in the country. an industry
In the week following demonetisation, soya bean arrivals in select major
states collapsed by 87% relative to average arrivals over the week preceding body with 3,000 direct members conducted a survey which revealed a 60%
demonetisation. The cash crunch has also hit the demand side, with the sales job loss in the micro and small scale sectors and a 47% dip in revenue for
dipping so low that farmers are having to part with their produce at almost small scale traders, shops and micro industries.
half the price. There are at least 45,000 to 50,000 roadside retail hawkers,
who are facing shutdown due to non-availability of new currency. Job Loss & Reverse migration
The effects of demonetisation have rippled through the economy and into Mounting job losses for informal workers employed in the Micro, Small and
the governments social services, including pensions for the elderly, widows Medium Enterprises (MSME) has triggered reverse migration from cities to
and the disabled. With demonetisation resulting in a severe shortage of cash, villages. Lack of other alternative sources in the village has led to a phe-
nomenal increase in the demand of work under
MGNREGA.
5
THE REAL STATE OF THE ECONOMY
Of the Rs. 15.44 lakh crores that was demonetised, Rs. 13 lakh crores was Currently, there are issues at the ends of both buyers and sellers. A vast ma-
deposited between Nov 10 and Dec 13, a number that made government jority of the debit cardholders, due to various reasons such as poor digital
calculations, as stated in the Supreme Court by the Attorney General, go literacy use it more to withdraw cash at an ATM rather than as an instrument
awry. The political response to the impending failure of the policy was the of cashless payment. In June 2016, there were about 75 crores debit cards,
shifting of goalposts by adding unintended consequences as additional objec- but only 12.9 crores payment transactions, which suggests that at a best case
tives. only 17% use it for a purchase. The actual number should be significantly
lower.
A keyword analysis of the Prime Ministers speeches post-demonetisation
by Praveen Chakravarty, Senior Fellow at IDFC Institute unambiguously On the other hand, sellers do not have the adequate infrastructure to receive
establishes the effort to shift the narrative from black money to that of a cash- payments. There are about 1.5 crore shops, but only 14.6 lakhs point of sale
less economy. devices that can handle credit or debit cards. These two reasons together
have resulted in poor adoption and usage of cashless mechanisms for pay-
ments. On the value side, data shows that in August 2016, debit cards were
Box 8.2: Impact on RBI used to withdraw Rs 2.2 lakh crores from ATMs compared to payments of
Rs 18, 372 crores.
Central bank independence is an important factor in building investor confi- Instead of addressing the basic issues, the government has chosen the route
dence. Indias central bank, the Reserve Bank of India, is a highly reputed of lottery to encourage digital payments.
institution with an impeccable record and has built its credibility over a num-
ber of years. Transaction cost
However, in the wake of demonetisation, questions have arisen regarding the In India, each time a card is swiped for any payment, the company who
central banks leadership, competence and independence. The RBIs re- installs the card machine apart from the network provider and the issuing
sponse to the parliamentary Public Accounts Committee revealed that the bank receives about 1% of the amount. This is called the merchant dis-
government had advised the RBI to consider demonetisation of high values count rate (MDR). Since the seller pays the fee, electronic payments be-
notes on November 7th, 2016, and the RBI Central Board approved the pro- comes a more expensive alternative to cash payments, acting as a disincen-
posal the very next day. This indicates that the endorsement of the proposal tive for digital payments.
was done without the required due diligence, a clear case of abdication of
responsibility. Anonymity and data
Over 60 circulars were issued in the 50-day window period, some of which Digital transactions leave a huge trail of data about payments including
were ill conceived and were subsequently withdrawn after public outrage. what product was purchased, where and with what other services. This
The RBIs poor planning and its limited capacity to foresee operational diffi- takes away anonymity and privacy, which should naturally be available to
culties has exposed the central bank to criticism from a wide range of ex- the buyer unless she is provided a choice on whether to insist on it it or not.
perts and rating agencies. Former RBI governors, Mr. Y V Reddy and Mr. In a democracy, the state should have no role in tracking legitimate pur-
Bimal Jalan, have expressed concern about the way demonetisation has been chases made by a citizen.
managed, the criticism that the RBI has been exposed to and the impact it
would have on its institutional reputation. Alternative options
The Employees Union of the RBI also alleged that the government has been
Below are a few alternative policy choices that that could have prevented
impinging on the central bank's autonomy by appointing a Finance Minis-
the deep distress and turmoil caused by demonetisation while achieving the
try official for currency coordination. This indicates a serious concern on the
same objectives in a more effective manner.
level of independence that the central bank enjoys, an issue that has long-
term implications for its institutional integrity.
1. Regulate real estate: Real estate is one important sector where unac-
counted cash is involved in both the buying and selling ends of a transac-
Another important issue that merits attention is transparency. The RBI has
tion. Cash payments are favoured so as to avoid stamp duty and to lower
not yet announced the amount of banned notes that were deposited in the
capital gains tax. These levies can be lowered to ensure better compliance.
banks in the 50 days window period
Further, the real-estate sector could be brought under the purview of the
goods and services tax (GST) to minimise evasion. Given that parliament
has recently passed the Real Estate Regulatory Authority Act, the govern-
.Cashless economy
ment could fine tune its working to ensure better policing of transactions.
As shown in the previous section, Indian economy is heavily cash based, 2. Hawala: The hawala business is a preferred route for laundering money.
with approximately 95% transactions happening in cash. Though digital It should be better policed. In addition, the root cause for the existence of the
payments are steadily growing, the base is low, and the possibility of a cash- hawala business, the high cost of doing business must be addressed. This
less economy or even the so-called less-cash economy in a true sense is re- can be achieved by comprehensively reviewing the system of capital con-
mote. trols. The Prime Ministers resolve to make India the most open economy in
the world rings hollow without capital-controls reform.
At one level, there are issues like lack of strong infrastructure, poor digital
literacy and high transaction cost that limits adoption. On the other hand, the 3. Banning Participatory Notes (P-Notes): Unaccounted money that is
fundamental question of whether a cashless economy is a desirable goal, routed out of the country finds its way back as laundered money through P-
considering important issues of security, anonymity and privacy, have fallen notes. The central government could have banned this method instead of
by the wayside in the haste to shift goalposts. banning all SBN.
6
THE REAL STATE OF THE ECONOMY
4. Upgrading data and technology in tax systems: The use of advanced for the economy and has imposed large burdens on all stakeholders in-
technology could have captured minute traces and patterns of tax evasion. It volved. The informal economy, which employs a large number of unskilled
would have been easier for a tax officer to compare and assess various prop- and semi-skilled poor, has been hit more heavily than the formal sector. Ironi-
erties of individuals and identity evaders. At the same time, since the avail- cally, a policy primarily touted to unearth black money from the rich and
ability of data is naturally on the rise, and GST will also be implemented corrupt, has hit the poor the hardest, while the black money holders, by and
soon, tax authorities will be able to undertake better triangulation while de- large, have laundered their money back into the banking system. The pain
tecting tax evasion. unleashed on the Indian people and the economy is completely unjustified.
Therefore, there is no doubt that demonetisation is a misguided policy and a
5. Political funding: Running a political party and fighting elections re- monumental blunder.
quires large-scale resourcing. Our unrealistic campaign finance laws per-
versely incentivise some sections of our political system to engage in
these activities through unaccounted money. Fundamental reforms, includ-
ing state funding of elections, are required in order to change over to a
political system grounded in transparency.
Conclusion
7
THE REAL STATE OF THE ECONOMY: 2017
Chapter 9
3.2 3.2
60 2.9 50.91
3 Another factor which biases GDP
40 2.8 growth estimates in India concerns dou-
2
ble deflation versus single deflation.
20 The international practise is to use dou-
1
ble deflation. Prices of outputs are de-
0 0 flated by an output deflator and input
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 (BE) prices by an input deflator, after which
the latter are subtracted from the former
Indian Basket (Crude Oil) $/Bbl Revenue Deficit as per cent to GDP Fiscal Deficit as per cent to GDP to provide real estimates of Gross Value
Source: Union Budget documents and Controller General of Accounts Added. India uses single deflation
1
THE REAL STATE OF THE ECONOMY: 2017
which imparts a system- crystal clear that (a) the recovery began in the last
atic bias in the real (constant price) estimates, even when the nominal (cur- year of the UPA-2 government when the growth rate accelerated from 5.6%
rent price) estimates are accurate. The direction of bias depends upon the in 2012-13 to 6.6% in 2013-14 and (b) that the NDA government took two
relative movement of the prices of final products, on one hand, and input years to match the one percentage point increase in the growth rate deliv-
prices on the other. If final prices are rising faster (slower) than input ered by the UPA-2 during 2013-14.
prices, the real GDP growth estimate will be biased upwards (downwards).
After the Modi government took office, the rapid drop in crude oil prices It is also pertinent to note that the average growth rate achieved during the
would have had the effect of imparting an upward bias to the estimates of first two years of NDA is much lower than the growth rates achieved dur-
real GDP growth. ing the first two years of both, UPA-1 and UPA-2. Further, even if 2016-17
registers the projected 7.1% growth rate, NDA will have clocked a growth
9.2 MACROECONOMIC INDICATORS rate which will still be lower than the growth in the first three years of both,
UPA-1 and UPA-2.
Questioning the GDP Numbers
Additionally, now that the GDP number has increased, it has also become
In January 2015, the Indian economy suddenly started to look much health- easier for the government to meet fiscal deficit targets which are measured
ier than before. The Central Statistical Office had changed its method of as a percentage of GDP.
calculating Indias Gross Domestic Product. There were two key changes:
Another example of how the change in calculation method can mislead
1. The base year for GDP calculations was changed from 2004-05 to arises when we examine the growth in the last quarter of 2014-15 which
2011-12. jumped by 1.4% points compared to the last quarter of 2013-14. This mas-
sive jump arose simply because the government steeply increased excise
2. GDP was calculated based on Gross Value Added at market prices rather duty on petrol and diesel in the preceding six months even as international
than on the basis of factor costs. crude oil prices plummeted.
This means that the indirect taxes that the government earned through, e.g., Thus, as we probe deeper, we find that the recent growth in GDP is inflated
sales tax and excise duty, were added to the GDP, and subsidies were de- because of dubious and unsustainable factors that do not portray the lived
ducted. Thus GDP figures were enhanced as a result of the way GDP was reality of the people. And even after such methods, the performance of the
calculated rather than because additional value was actually created. Modi government in terms of GDP growth does not match the correspond-
ing growth during UPA-1 and UPA-2. In fact, the recovery that began dur-
ing UPA-2 has slowed down during the tenure of the current government.
Though the change in the method of calculating GDP is in tune with global
practices, economists including the previous Governor of the Reserve
Bank of India and the current Chief Economic Adviser have greeted the In spite of favorable oil prices, GDP growth has been declining, even
new GDP figures with scepticism. The optimistic scenario the new GDP before Demonetisation
figures painted did not square with the reality portrayed by some of the
standard measures of growth, e.g., Index of Industrial Production (IIP), rate Even after accounting for the oil price bonanza and the overestimation of
of Gross Fixed Capital Formation (investments), bank credit, corporate GDP figures, it is evident that there has been a decline in economic growth.
profits and railway freight. At the start of the current fiscal year, the Ministry of Finance estimated that
GDP growth would be between 8% and 8.5%. This was further revised
Since the CSO did not recalculate GDP for the UPA decade 2004-14, at down to 7.6%. In December 2016, the Central Statistical Office reduced its
first glance, it would appear that GDP growth under the NDA government estimate of GDP growth to 7.1%. This covered the period up to October
has been stronger in comparison to the last few years of UPA-2 than it actu- 2016, before the demonetisation shock to the economy. Since then there
ally has been. The global best practice in such scenarios is to publish both have been numerous estimates of the expected slowdown in the economy
the old and new series for a period of time. When we do this, it becomes triggered by demonetisation. In fact, the former Prime Minister, Dr. Manmo-
han Singh highlighted in the Parliament that the effect on GDP would be at
least 2%. What this translates to in terms of
jobs, welfare, etc., has been detailed in vari-
Fig 9.2: GVA at Basic Prices ous chapters in this volume.
! .
9.5 9.6 9.3
10 8.9 Decline in Foreign Portfolio Investment
8.6
7.6
8 7.1 7.2
6.7 6.7 6.6 One consequence of the decline in growth is
5.6 that foreign investors have begun an exodus
6 from India. This will be accentuated by the
4.5 4.7
economic slowdown and overall uncertainty
4 in monetary policy following demonetisa-
tion. The flight of foreign capital from India
2 adversely affects our ability to enhance
growth by building on foreign investment.
0 The demonetisation also came just as the
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2
THE REAL STATE OF THE ECONOMY: 2017
6
Problematic Trends in First Three
Years of the Government:
5.5
5.6
5
One of the biggest components of
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 GDP is private consumption, form-
2016-17 (est)
70.00
Source: RBI The BSE-CMIE-UMich consumer
3
THE REAL STATE OF THE ECONOMY: 2017
Fig 9.5: 2W Demand Proxy for Rural Demand We say in the long-term because the backward linkages of bro-
ken supply chains have been severely mutilated to see a quick
! recovery. The transporter, the wholesaler, the shop keeper are
40%
unable to deliver the goods to the consumer even if production
30% takes place. The farmer has suffered due to inadequate access to
quality agricultural inputs like fertilisers, seeds and pesticides.
20% Nor can the farmer employ agricultural labourers for sowing, de-
weeding and so on. The acreage of sowing data looks doubtful.
10% The fertiliser sales are already down by 21.86% in Oct-Nov com-
pared to the same time period last year. If farmers can pass over
0% the acute cash shortage and ensure that the sowing translates to
strong growth in output, the increase in rural consumption can
-10% provide some moderation from the slowdown. This however
Dec-10 Oct-11 Aug-12 Jun-13 Apr-14 Feb-15 Dec-15 Oct-16 seems unlikely based on various reports across states, as pointed
on in the chapters on rural economy and demonetisation. Thus
2W Domestic Growth (3m avg., Growth y/y) keeping up GDP numbers post the negative shocks of demonetisa-
tion will be an uphill battle.
Source: SIAM
Investment
Fig 9.6: Languishing Rural Wages Gross fixed Capital Formation is an indicator of investment in an
economy; this indicator has hovered at low levels in the past 3
30% years under the Modi government. Incidentally, the same indica-
Rural Agri Wages tor saw a double-digit growth under the UPA even after the eco-
25%
nomic crisis of 2008-09. Change in stock indicates private capi-
20% tal formation, which witnessed a 15% shrink between 2014-15
15% and 2015-16. With such a low rate of capital formation, what
10% have campaigns like Make in India really achieved?
(Ref Fig 9.8)
5%
0%
Stalled Projects Logjam at the PMO
-5%
-10% The rate of stalled government projects has not changed much
Oct-02 May-04 Dec-05 Jul-07 Feb-09 Sep-10 Apr-12 Nov-13 Jun-15 since 2013. In terms of private projects, the value of stalled pro-
jects under this government stands at well over $777 billion, an
Nominal Growth Real growth increase of 4.31% in stalled private projects since the UPA years.
Hype around the uptick in the on the ease of doing business rank-
Source: Labor Bureau, CMIE ing has not altered the ground reality of stalled projects.
4
THE REAL STATE OF THE ECONOMY: 2017
Gross
Fig 9.8:Fixed Capital
Gross Fixed Formation
Capital Formation GDP. This is the lowest since 4QFY07. Such a
current account balance indicates a savings invest-
80.00% ment gap, and is indicative of a weak investment
67.70%
environment.
60.00%
44.70% However, according to CMIE, the liquidity crunch
that we see in the immediate short run is poised to
40.00% 31.60% 31.30%
26.70% last in the long run. Investments as a proportion of
20.30% GDP during 2016-21 is projected to fall compared
20.00% to its level during 2011-16, according to CMIE.
3.50% 4.90% 5.50%
16.20% 13.80% 16.20% 3.40% 4.90% Against such a backdrop, the governments hype
11.00% 12.30%
0.00% 7.70% 5.30% about foreign inflow of capital into the country
2010-11
2015-16 (AE)
2005-06
2006-07
2007-08
2008-09
2009-10
2011-12
2012-13
2013-14
2014-15
seems far-fetched, and a seeming lack of policy
-20.00% cohesion within the government itself is becoming
-18.60% apparent.
-40.00%
-43.40%
Government Spending
-51.40%
-60.00%
Problematic Trends in First Three Years of the
Change in inventories % Gross Fixed Capital Formation % Government:
Source: Economic Survey 2015-16
This leaves us with public investments as the only
option for growth apart from net exports. A key
indicator of this is railway spending that stands at
Stalled
Fig 9.9: Projects
Stalled Projects just Rs.50,826 crores for the fiscal 2016-16 (up
till Q3) against the budgeted Rs.1,17,000 crores.
20.74 Certainly, the railways will not be able to spend
22 20.01 the budgeted amount in the remaining two
19.24
17.95 17.81 18.01 17.99 17.56 months. In fiscal 2015-16, the railways was only
17.33
16.43 able to spend Rs.50,333 crores. While we see an
17 increase in the capital outlay, the railways has
shown that it has only a limited appetite for utilis-
ing its outlays.
12
The dwindling fortunes of schemes such as Bharat
Mala, Sagar Mala, and PM Gram Sadak Yojna all
7 raise doubts about this governments ability to
spend effectively. Clearly all of this is not enough
5.47 to revive a faltering economy.
5 5.16 4.94 4.77 5.03 4.81
2 4.32 3.92 4.36
Effects of Further Stickiness Due to
Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Demonetisation
-3
Post-demonetisation, two very important ques-
Percentage Stalled(Government) Percentage Stalled(Private sector) tions arise: despite banks being flush with low
cost funds, who is it that really wants to borrow in
Source: CMIE an environment of volatility, let alone invest? And
perhaps more crucially, in the absence of private
investment, in what direction will the government
Fig 9.10: Revised GDP Growth Forecast for 2016-17 Post-Demonetisation spend its newly collected money?
5
THE REAL STATE OF THE ECONOMY: 2017
70,000.00
9.5 TRACKING INFLATION
60,000.00 METRICS
Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17
Exports (USD million) Imports (USD million) Former governors of the RBI have
harped on inflation as a reason for
Source: Ministry of Commerce & Industry their refusal to reduce rates. While
the CPI, the key matrix used in
Problematic Trends in First Three Years of the Government calculating inflation, has moved from 6.3% to 5.22% in the period of 2014-
16, the crude oil barrel prices saw a 33% dip. Retail oil (10% of the CPI
Past economic surveys have often touted India as a sweet spot in the volatile basket) has been on the rise, food prices (46% of the CPI basket) continue to
economic environment of the world but a quick glance at export perform- show the opposite trend. We could, hence, achieve greater reduction in infla-
ance tells a different story. Exports are at a twenty month low as can be seen tion had retail oil prices reflected the fall in international crude prices.
from the figure 12 below.
This year, despite a bumper crop and increased MSP, we see that mandi
It is not possible to exclusively blame the international scenario for dwin- prices have actually decreased. This could be explained by a pattern of dis-
dling exports, as countries who have responded systematically to those cycli- tress sales by farmers in the precious two drought years, by increased input
cal fluctuations have managed to keep their export sector thriving, as can be prices, and possibly by a decrease in non-farm employment that has damp-
seen in Figure 12. For instance, as pointed out in the Economic survey 2015- ened market conditions.
16, it cannot thus be argued that there is no market for textile goods (a key
component of Indias export basket), as Vietnamese exports are consistently Similarly, despite crude oil prices reducing the world over there has not trans-
high, but instead that there is no market for Indian textile goods. Imports net lated into a gain to end consumers in terms of reduced petrol prices and in-
of oil is a critical indicator of healthy GDP growth. This has also fallen. Per- crease in disposable income. If anything there is instead increased cess col-
versely, the external sector is adding to GDP vis--vis previous years since lection.
while exports have fallen, imports have fallen even more.
From inflation to deflation: When post demonetisation, demand weakened
Effects of Further Stickiness Due to Demonetisation due to sudden liquidity shock a deflationary pressure built up. This was seen
more predominantly in the rural sector while the urban sector too gained due
Unleashing demonetisation in a manner so abrupt on a country that relies to a fall in food prices. Deflationary pressure in the rural sector is troubling
heavily on cash transactions and the informal economy has brought about as it clearly indicates lack of demand in a market that already had low de-
significant liquidity shocks which in turn disrupt supply chains in the long mand after two consecutive droughts. This will have a strong bearing on
run. This is a worrying statement for exports which are already at a 20 rural household consumption and nutritional outcomes.
200 14
180 12.4 12
160 10.4 10.4
10
140 9.7
9.1
120 8.4 8
100
6.7
6.3 5.6
6.2 5.22 6
80
60 4
40
2
20
0 0
9.6 CONCLUSION - PROSPECTS
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
FOR THE FUTURE
Crude Oil Indian Basket ($/Bbl) Retail Petroleum Price ($/Bbl) CPI with food
Source: RBI & Ministry of Petroleum & Natural Gas When the economy needed to be
6
THE REAL STATE OF THE ECONOMY: 2017
7
APPENDIX I
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Das, A et al. Impact of Agricultural Credit on Agriculture Production: An Nair, S. (January 9th 2017). As rural hands return, NREGA demand spikes
Empirical Analysis in India, Reserve Bank of India. over 60 percent.
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Press Trust of India. (March 15th, 2016). Agri Sector grows by 1.6% in first spikes-over-60-per-cent-4465577/>
4 years of 12th Five Year Plan.
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AgriXchange. India Export Statistics. ht-relief-from-centre/article7913853.ece>
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Saxena, R. et al. (May 2015). Estimates and Analysis of Farm Income in Sethi, N. (2016) How MNREGA crashed after Modi govt's off-record
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CHAPTER 4 dening-economic-inequality-in-india/story-MercvWzyhhbwuPeU1myjbN.ht
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CHAPTER 7
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l-gst-say-ministers/story-6Wtwam4ohvHv44BJWISDpM.html> Balakrishnan, P. (January 24th, 2017). The Price of fiscal folly
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14
<http://www.livemint.com/Opinion/SY0fqo8rxPPVnob8IC089M/The-pros-a Times of India, (December 15th, 2016) Roadside Vendors Businesses Take
nd-cons-of-subsidies-through-direct-benefit-transf.html> a Hit, Many Shut Down.
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Kumar, R. (January 26th, 2017). The case against universal basic take-a-hit-many-shut-down/articleshow/55987672.cms>
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The-case-against-universal-basic-income.html> Chari, M. (December 19th, 2016) In Andhra Pradesh villages, Demonetisa-
tion Has Deprived the Elderly of Their Pensions.< http://scroll.in/a/824271>
Ghatak, M. (September 28th, 2016). Is India ready for a universal basic in-
come scheme?<http://www.ideasforindia.in/article.aspx?article_id=1696> Saxena, N. (December 9th, 2016) Demonetisation Death Toll: 90 People &
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cheme-demonetisation-modi/story/1/15062.html> Based: CLSA.<
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Khera, R. (December 20th, 2016). A Phased Approach Will Make a Basic -transactions-in-india-are-cash-based-116111400495_1.html>
Income Affordable for
India.<https://thewire.in/88350/basic-income-phased-approach/> Vyas, M. (January 12th, 2017) India's real GDP growth to slip to 6% in
2016-17.
NDTV. (January 16th, 2017). Universal Basic Income For India Suddenly <http://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=2017-01-12%
Trendy. Look 2017%3A49%3A49&msec=646>
Out.<http://www.ndtv.com/opinion/decoding-universal-basic-income-for-ind
ia-1649293> Rai, S.(January 16th, 2017) What the Increase in Tax Collections Does Not
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for the bottom 50 -tell-us-about-indian-economy-post-demonetisation>
percent.<http://indianexpress.com/article/opinion/columns/no-proof-require
d-financing-basic-income-for-the-bottom-50-per-cent-4462648/> Chakravarty, P. (December 5th, 2016) How Modi Changed (And Changed)
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Banerjee, S. (January 14th, 2017). A Contentious <http://www.indiaspend.com/cover-story/how-modi-changed-and-changed-t
Proposal.<http://indianexpress.com/article/opinion/columns/poverty-alleviat he-demonetisation-narrative-54391>
ion-universal-basic-income-ubi-direct-benefit-transfer-dbt-black-money-mg
nrega-a-contentious-proposal-4473170/> Chakravarty, P. (January 17th, 2017) Urjit Patel: The Five-Year Twist.
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ar-twist>
CHAPTER 8
Deccan Herald, (December 7th,2016) Curbs on Co-Op Banks Hit Dairy CHAPTER 9
Farmers Hard.
<http://www.deccanherald.com/content/585226/curbs-co-op-banks-hit.html Centre for Monitoring Indian Economy
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Central Statistics Office, <
Nibber, G.S. (December 12th, 2016) My business will be finished: Cash https://data.gov.in/keywords/central-statistical-organisation >
crunch hits farmers in Punjab.
<http://www.hindustantimes.com/india-news/my-business-will-be-finished-c Controller General of Accounts,< http://www.cag.gov.in/>
ash-crunch-hits-farmers-in-punjab/story-1uDg1xpm0CPqDgfqguSwiI.html>
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Patra, A. (December 23rd, 2016) Note Ban Sends Beedi Units up in Smoke. vestments year wise report <
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Renganathan, L. (November 28th, 2016) Demonetisation Woes: Fishermen Society of Indian Automobile Manufactures < http://www.siamindia.com/>
Keep Off Sea.
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Alone Cant Turn Agricultural Markets Cashless.< penditure-private-consumption-private-investment-exports-across-the-aisle-
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15
Chinoy, S. (September 8, 2015) Gross Deflator Problem.
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16