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.