Tuesday, September 19, 2017

Narendra Modi Government Faces Economic Reality

The full impact of Narendra Modi government’s economically unsound policies of demonetization, GST as well as lose money policy of RBI in the form of lending cheap artificial credits to insolvent borrowers via commercial banks resulting in huge load of unproductive debt has started to show on the Indian economy.

Finance ministry officials are now saying that India could be forced to cut spending on key infrastructure such as railways and highways as lower-than-expected tax collections and sluggish growth have upset the government’s budget calculations. This was well expected. As we have said in past here on Mises India, when the government gets bigger and totalitarian, the economy tanks rapidly. When the business environment becomes extremely uncertain, entrepreneurs will halt their business plans and stop any further present or future investments, and this will hit the economy hard because only production, saving, investment and capital accumulation can increase economy’s future growth. As Thomas Sowell famously said, the first principle of economics is that there is scarcity of everything, and the first principle of politics is to disregard the first principle of economics! Politicians like Narendra Modi think that they can disregard the laws of economics, which are absolute a priori laws of human action, forgetting the consequences of ignoring them. They forget that the forces of market are much more powerful than any politician and his political power. Market forces are always working in the background, and in the end they will force politicians like Modi to stop wasting society’s resources, and that is what is now happening in India. The report throws light on this fact:
The main problem has been the introduction of the GST, billed as India’s biggest tax reform in 70 years.
Ambiguous rules, an onerous return filing system and glitches with its IT back-end have made doing business far more complicated for many companies. Frequent changes in tax rates after the GST’s launch have heightened business uncertainty, resulting in many firms failing to register for the new tax.
India’s GDP growth itself has slowed to 5.7 percent in the April-June quarter from 7.9 percent a year earlier, a slowdown also partly blamed on the introduction of the GST, adding to the pressure on the state coffers.
Dividends from state-run companies are expected to fall and a $11 billion share sale programme is slowing down.
Complicating the finance ministry’s budget arithmetic further, the Reserve Bank of India announced last month that its annual surplus, a dividend transferred by the central bank to the government each year, would be only $4.9 billion, less than half the initial estimate, largely due to costs of Modi’s shock “demonetisation” initiative last year.
If Narendra Modi is not going to learn any lesson out of his momentous mistakes then the Indian economy is just going to go in a total free fall in future. If he continues his binge spending programs and RBI keeps on cutting interest rates to boost growth artificially then the economic woes of Indians are just going to become astronomical in future. Government spending and RBI manipulation of interest rates can’t create or boost growth. Government spending is always inimical to progress because what government spends on A, it has always took that forcefully from B; spending on A is always wasteful because it ignores the individual’s subjective preferences embedded in price signals, and so it lacks the market test of profit & loss. Progress requires government spending of 0 rupees.  As long as that is not happening, do not expect any real growth in India. The disaster in India continues to unfold.

Monday, September 4, 2017

The Demonetization Disaster

The exercise of demonetizing around 87% of all circulating currency note supply taken by Narendra Modi and RBI last November has resulted into nothing but overall disaster for the economy. In his televised speech on 8th November, 2016 Narendra Modi talked about three main goals of the whole demonetization exercise, and they were:
  1. Curbing financing of  terrorism through  the proceeds of Fake  Indian Currency Notes (FICN)   and use of such funds  for subversive activities such  as espionage, smuggling of arms , drugs and other contrabands into India; and
  2. For eliminating Black Money which  casts a  long shadow of parallel economy on our  real economy
At that time Modi government was expecting that the substantial amount of black money that people were hoarding will never return in the banking system and that will become a windfall gain for RBI which it can then transfer in the government account. Now that 10 months have passed and data are coming in, what is the outcome of this exercise? Did this exercise bring back any windfall gain to RBI which it transferred to the Modi government? Did a substantial amount of black money never returned to the RBI vaults? Did the fake currency notes stopped circulating in the economy? Did the terrorism financing stopped and so terrorism stopped?

Even after 10 months of this exercise the Indian central bank RBI has yet to release full figures, but in their annual report, released few days ago, the RBI said that total 99% of all banned notes have returned in the system: India received a total of Rs 15.28 lakh crore in banned 500 and 1,000-rupee currency bills, the RBI said, which means 99 per cent of the banned cash has been legally returned in the eight months since demonetisation. The one per cent that has not returned to the RBI adds up to around Rs 16,000 crore. This means the demonetization exercise failed in unearthing any black money. In fact, people were able to convert their black money into white using the demonetization exercise itself! After this news came out, the finance minister Arun Jaitley was seen changing objectives of this whole exercise to hide his government’s failure by saying that, that was not the objective of demonetization…it was not an exercise to confiscate money but to nudge India towards digitization, ending anonymity of cash. Basically the government is now saying that the whole aim of demonetization was making India a ‘cashless digital economy’ and not curbing corruption and black money as originally stated by them.

Did RBI receive any windfall gain which it then transferred to the Modi government? Not at all. In fact, the recent data released by RBI show that instead of getting any windfall gain, RBI has made losses and it is only transferring Rs 30,659 crore, less than half the amount Rs 65,876 crore it transferred last year, dividend to the government this year implying lesser non-tax revenues to the government. This means, demonetization exercise turned out to be very costly for the government! It cost more money to RBI to print new currency notes and bring back old notes in the system than any so-called benefit of demonetization exercise!

Demonetization has also failed in curbing terrorism as can be seen in the on-going almost daily insurgent attacks on Indian nation state forces in places like Kashmir, North-East etc. The data released by the South Asia Terrorism Portal shows that, after demonetization exercise in year 2017 132 security personnel and 139 civilians have died in Jammy and Kashmir region itself. The three years of Modi government has turned out to be more deadly for the security forces compared to past years of Manmohan Singh government.

And, the fake currencies of even the new currencies introduced by the government started circulating in the economy during the demonetization exercise itself.

Not only this, the latest GDP data released by the Central Statistics Office (CSO) show that the first quarter GDP growth rate of the Indian economy has hit the lowest in last 3 years of 5.7% only, which is the slowest pace of growth under the Modi government. The demonetization exercise and then implementation of GST last July has hit the Indian economy hard. This was expected because when government fiddles with 87% of economy’s money supply, increases taxes on its people incessantly and also makes tax compliance so complicated that no one knows what is going on, the economy is going to tumble. Businesses survive and thrive in an environment of secure property rights and lower future uncertainty. When the economy gets one shock policy move after another in the form of demonetization and GST, it creates an environment of extreme suspicion and uncertainty among the business community. They start expecting more such shock policy moves from the government and stop any big present or future investment plans, which results into economy almost halting.

All in all, demonetization has resulted into total disaster for the Indians and their economy. The former RBI governor Dr. Raghuram Rajan warned about the dangers of demonetization and told Modi government about its heavy short term cost which will far outstripped its any presumed long-term benefits (sic), but Modi didn't listen to him and removed him from his position. The present BJP government is not ready to accept its failures and make corrections, but is busy making excuses. In such an environment expecting anything positive in future is going to result into disappointment only. We must brace-up for even worst situation in future because the world itself hasn’t got out of the deep depression that started in 2007.