The decade in which the economy gobbled up the headlines and prime time

The biggest economic story of this decade is clearly GST, whose receipts have fallen way short of target, creating ripples in Central and state finances

In a decade in which massive, often policy-induced economic crises shaped India, two news pegs from the two terminal years capture the trend so well. 

“The Reserve Bank of India not to make public any inspection reports, risk assessment reports and financial inspection reports of banks under the Right To Information Act”. (Supreme Court) 

“The Reserve Bank of India has been told to disclose pre-board meeting agenda notes and minutes and draft a disclosure policy under the Right To Information Act”. (Central Information Commission) 

For those not on track with the developments, it could be difficult to make out which came first. The Supreme Court order was issued last week, that is, in December 2019. The order of the Central Information Commission came ten years ago, in December 2010. Flip their order and the economic time line of this decade would seem like a gradual improvement from chaos to a disciplined banking environment. But, as the actual sequence shows, even after a decade of the CIC ruling, India’s banks are still wrestling with the lingering impact of some of these crises, which makes them uncomfortable about sharing the data on loans. 

What were the riveting episodes of this decade for the Indian economy? The five which head the list include the episode of the three natural resource allocation scams (2011-13), that of India’s descent into the fragile five club of nations and subsequent recovery (2013-14), the fracas over the Land Acquisition Act and its repeal (2013-14), demonetisation (2016) and, finally, the Goods and Services Act (2017). 

There were others too, most notably the rapid change of Governors at RBI in the last five years. The list will include JAM—Jan Dhan, Aadhar- and mobile-linked Direct Benefit Transfer schemes, the passage of bankruptcy laws—the Insolvency and Bankruptcy Code—India’s pivot towards renewable energy, repeated loan waivers, the twin balance sheet problems whose outcome was the pile of bad loans of public sector banks, and finally, the mergers of these public sector banks into twelve from twenty eight at the beginning of this decade. We do not include here the kerfuffle over the counting of GDP and other data like that of employment, since they were not economic episodes by themselves. 

N Bhanumurthy, professor at NIPFP, plumps for DBT as the biggest instrument of change in the Indian economy in this decade. “It has transformed the narrative of the government expenditure from outlays to outcome. The strident opposition to subsidies has become muted as it has become clear that leakages have come down drastically”. 

Yet, in terms of recall it would trail the set of first five. Each of these episodes were also a demonstration of inadequate understanding of the risks within the government. They rebounded on the banking sector, leaving it with a pile of Rs 10 trillion worth of bad loans. They had a positive too. Each forced a set of reforms in factor markets, mostly capital—in bankruptcy rules, of and to some extent, land. 

The three natural resource allocation scams—that of 2G, of coal and of the Commonwealth Games—snowballed after the tabling of respective audit reports on them by the Comptroller and Auditor General. Individually and collectively, the accusations created enormous public furore over the perceived corruption by the governments of the day. The Commonwealth Games report cost then Delhi chief minister Sheila Dikshit her job, while the other two contributed handsomely to the defeat of the Congress party-led UPA government and its majority in the Lok Sabha. The cases travelled to the Supreme Court and were the subject of CBI investigations. The banks stood to lose thousands of crores as each loan went sour. 

In between, India slipped into the league of emerging nations that were hit the most when the US Federal Reserve began withdrawing its monetary stimulus. The term ‘Fragile Five’ was coined by a Morgan Stanley report after Fed Chairman Ben Bernanke hinted in May 2013 that he was likely to start the process of normalisation of monetary policy. The others were Turkey, South Africa, Brazil and Indonesia, all of whom were running current account deficits that got exacerbated when easy money went out of their markets. Their currencies fell steeply. To make their position worse, the price of crude shot up in the international markets. India took plenty of measures, including long-term promises to offer “on tap” banking licenses, and a short-term measure, the FCNR scheme to draw in foreign exchange via three-year deposits. It raised $26 billion, “more than any of us anticipated. But, equally important, confidence picked up, the rupee continued strengthening…”(Rajan) But it brought down India’s GDP growth rates, company incomes dwindled, which meant the huge infrastructure loans the banks had handed out were not going to be repaid soon.

The uproar over the Land Acquisition Act had begun in 2008, but it reached its peak in this decade. It forced the UPA government to bring in a new law that  effectively prohibited any state agencies from acquiring any land. The law was sought to be overturned through an ordinance (re-issued twice) by the NDA government, but had to be rolled back over massive uproar. It was replaced by the “Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Second Amendment) Bill” in 2015, but remains in deep freeze as a property of a joint parliamentary committee.

The demonetisation scheme was the fourth major disruptor in this decade. It was announced on November 8, 2016, but by all accounts was planned several months ahead. Former finance minister Arun Jaitley had announced plans to sharply expand the reach of the Mudra Yojana and expand the reach of ATMs, particularly in rural areas, in Budget 2016. The decision to demonetise 86 per cent of the currency in circulation is still being measured for its impact on the economy. Estimates of how much of the GDP growth it shaved off then and subsequently draws massive attention even now, three years later. It created a massive surge in deposits with banks, which in turn lent big-time to NBFCs, which funnelled it to real estate companies. As former finance secretary Subhash Garg wrote in a blog, demonetisation had removed “the support of unaccounted funds (for) the residential real estate industry…but..for some inexplicable reasons, the NBFCs and HFCs decided to throw a lifeline to this beleaguered industry, by lending to these projects”. He warns, “Liabilities of bankrupt real estate companies has the potential of taking the bottom out of the economy.” 

The biggest economic story of this decade is however clearly GST. The Act was in the making for over thirteen years, with Vijay Kelkar, as the adviser to the government, recommending it in 2004. The good and bad of the tax is being debated massively. The tax has broadly four rates which Kelkar says is the reason why collections are down. Speaking with Mint newspaper, he said “If the administration is not capable, keep the policy simple. A single-rate GST with a low rate, where the administration has low powers of investigation and punishment, is the way to go”. The NDA government and the states went the other way to protect their revenues, which has turned out to be a big error. A Business Standard report shows as GDP growth rate has dipped in FY20, the aggregate GST receipts has fallen way short of target. It would need to grow by Rs 1.15 trillion from December to March each month, a target it has not met this year in any month. The states are worse off, recording almost no growth in receipts due to consumption slowdown. 

GST has extracted a huge cost on small and medium enterprises. While it has made them clean up their books, the dues have wiped out their ability to expand and provide employment. The slowdown in the economy owes quite a bit to this impact. And naturally this has impacted the banks sitting on the lowest credit disbursal trend in a decade.

The tax drama is consequently still playing out and as of now is on track to be the biggest economic news for India as the country steps into the next decade. And as the newspaper clips show, the banks are still clearing up the debris from some of these episodes.