A New Story for Growth?

Ditching Old Narratives

A New Story - Image generated with Nightcafe

Prime Minister Modi drives narrative. The economic narrative of the last ten years has been of a reformist, business-friendly government that has driven the economy to new heights. In his speech to the Lok Sabha last week, the Prime Minister boasted of the speed we have achieved in the last ten years, and vowed that Modi 3.0 will move 3x faster.

Political speeches are rhetorical, so there’s no point questioning what will move 3x faster - will the next monster move, like demonetisation, give us one hour twenty minutes, rather than four hours; will national lockdowns be even more ill-considered, or will armed forces recruitment plans be rushed through with even less consultation?

Let’s stay with the number that concerns me most deeply, which is the growth of the economy. Crucially, let’s also examine the narrative that surrounds it. Whenever leading economists have questioned headline numbers of Indian economic growth, they have been pointed to two numbers that show how well the economy is doing:

GST collections, and

The Nifty.

Against the persistent headline narrative of “All Is Well!”, several economic indicators suggest otherwise:

• The informal sector stopped creating jobs in 2016, while job growth in the formal sector remains anaemic.

• Indian businesses are not investing in India the way they used to.

• Foreign Direct Investment is at a new low, and

• Household consumption is sluggish.

Now, GST collections have turned sluggish, too. June registered a 7.74% growth over the last year; after accounting for inflation, this is a crawl, and way below the annual growth of 11.6% written into the provisional budget for this financial year. The Finance Ministry’s response so far: a decision to downplay the significance of GST collections, which until June served as a monthly bugle call of “All Is Well!”.

Indulge me for a bit, and assume that the Finance Ministry knows what I have long suspected - that underlying growth in the economy is significantly short of the headlines. Our  politicians certainly know this, especially those who lost their seats in the Lok Sabha elections: joblessness and the loss of buying power were issues widely raised by the electorate. The question is, how will a slowing economy affect the budget announcements, later this month?

The answer will begin with the narrative. Is the Modi government going to change the narrative that India is the fastest growing economy in the world? If it doesn’t, it can’t announce any major policy shifts, because you don’t fix what ain’t broke.

2019 marked the last major move in our economic policy, when corporate taxes were cut drastically, in the belief that this would repair the balance sheets of our companies, empowering them to invest, and grow the economy. The balance sheets did get repaired, corporate profits soared, and the stock market boomed; just this Friday. Union Minister Piyush Goyal pointed to the Nifty to show how successful Modi 1.0 and 2.0 have been. But while investors like me grew rich, corporates did not invest, and the government had to step in with public investment to try and grow the economy.

Corporate investment remained slow because household demand was sluggish. Medicine works only if the diagnosis is correct. Corporate tax cuts ignited the share markets, not the bazaars. What the economy requires, instead, is a revival in household demand.

Will the Budget do this? I think not. Not in the measure required. In the last decade, the tax burden in India has shifted* savagely, from corporates to households. In 2014, income taxes collected from households accounted for 2.1% of GDP. Last year, they accounted for 3%. In the same period, corporate tax collections dropped from 3.4% to 2.1%. An almost exact inversion.

If demand is to recover, buying power has to be funnelled into Indian households. Slashing personal income tax would help the four percent of Indians who pay income taxes, and the government is hinting at measures to boost the fortunes of the average household. But, the government’s coffers are not overflowing. We are way behind on our path to fiscal prudence, and if GST collections continue to be slack, more expenditure will require more taxes. Which will have to come from corporates.

IF the government does raise corporate taxes - and this is a big ‘IF’ - it will need to craft a new narrative. If corporate taxes go up, equity markets will take a dive, and the government will no longer be able to say: 

“Look at the soaring Nifty! Look how well India is doing!”. 

To be completely honest, it will also have to say - 

“The corporate tax cuts of 2019 didn’t work.” 

This is a big pill for any government to swallow. Mea Culpa doesn’t come easily to politicians with larger-than-life egos.

And what will Modi 3.0 say about the economy if the Nifty falls, now that the GST number has been sent to the garage? This is not a trivial question. In the last five weeks, the Prime Minister, the Home Minister, and now the Minister of Commerce and Industry, have all flagged the Nifty as a pointer to their prowess. Will a regime so wedded to narrative make policy shifts that will sabotage their last remaining claim to economic success? I think not.

Which is why I suspect the upcoming budget will be full of half, or even quarter, measures - some relaxation in tax slabs for the salaried, some tinkering with capital gains tax, new but minor income transfers. Nothing that rocks the status quo, fragile though it is.

The pretence that the economy is robust will be extended. More harsh truths will have to emerge before they are accepted. Above all, scapegoats will have to be found, on whom to blame the state of affairs. A new narrative will have to be constructed before we see any significant measures that trigger widespread economic progress.

*https://economictimes.indiatimes.com/news/economy/finance/why-has-indias-corporate-tax-mop-up-failed-to-match-the-pace-of-personal-income-tax-collection/articleshow/101245568.cms