Economic Slowdown in India - Analysis Part 1

Anyone who has even the slightest idea about recent political news knows that the Indian economy is currently deteriorating. The GDP growth rate has fallen to only around 4-5% as compared to over 10% in 2010. While much blame has been placed on the Modi government for the same, are they really to blame for this phenomenon? Let us find out. 

Since this is a really important topic and I want to give every aspect its due attention, I will be splitting this article into three separate articles. This way, the article won’t get boring and at the same time I can cover all the facts. 

There are several reasons for the Economic slowdown in India. While any one of them may not independently affect the economy to a great extent, combined with others it has led to a kind of snowball effect which has resulted in the current predicament. I have identified several different factors which have influenced the economy, and we shall be discussing each factor in detail. 

Demonetization: On the 8^th of November 2016, PM Narendra Modi took a huge unprecedented step to fight corruption and terrorism. In a surprise move, he declared that with effect from midnight, all notes of 500 and 1000 denominations will not be legal tender anymore.  Whether or not the move accomplished what it was supposed to is up for debate, but one thing is for certain – Demonetization did no favors to the economy. Overnight, the stock market crashed, and over 30 people lost their lives in the ensuing chaos. But more importantly, the move also forced a lot of people who had huge hoardings of black money to either dispose of the black money, or declare it and then pay taxes on the same. However, the people of India found a way to work around this too. Businessmen with huge amounts of black money either paid bank managers to get their notes converted, or opened bank accounts in the name of their relatives or servants, in which money was deposited. According to a report released by the Reserve Bank of India, around 99.98% of all old currency notes were exchanged. But this move signaled to investors and businessmen, both within India and abroad, that the Indian market is very volatile. This has adversely affected the confidence of investors, discouraging investment in the Indian economy. 

 

Goods and Services Tax: Yet another major move by the BJP government was the rolling out of GST in a midnight session of the Parliament on 1^st July 2017. Almost all indirect taxes were abolished and replaced by GST as a result of this move. However, experts have said that there were several flaws in the implementation of the GST, which has resulted in a huge harm for the economy as well as numerous small businesses. GST also forced Micro, Small and Medium Enterprises (MSMEs) to hold on to their inventory until they could update their systems to comply with the GST Network. While all of these have since been dealt with, the imperfect implementation of the programme remains a complaint of several businesses even today. 

Low Domestic Demand: This is more or less a direct consequence of demonetization. As a result of demonetization, money laundering through assets has become quite difficult, bringing down the demand for commodities like automobiles and real estate, which were earlier the prime choices for people wishing to launder their money. While the fact that money is not being laundered is a good thing, the negative impact that this is having on several industries cannot be denied. The automobile and real estate industries have been performing very poorly over the past two years. It has become very difficult to transact in land due to several restrictions and new laws, putting several brokers and agents out of jobs. 

Long Term Gains Capital Tax: The Long-Term Gains Capital Tax, or LTCG for short, was redefined in the Union Budget of 2018. It states that a tax of 10% will be applied on all Long-term gains made on the selling of equities in the Indian stock market. Earlier, this tax was only applicable for domestic investors, but now this is applicable to Foreign Institutional and Retail Investors as well. Let me explain this with an example. Suppose I buy a share of X Ltd. for 200Rs. The market moves favourably and my share value increases to 400Rs. Now, if I sell off this share, I will have made a capital gain of 200Rs. Under the new law passed, this gain is now taxable at 10%, which means my net gain after paying off taxes will only be 180Rs. The imposition of this tax has severely eroded investor confidence in the Indian share market and further worsened and economic condition of the country. 

These are some of the factors that have affected the economic condition of the country to a great extent. Understanding these factors is crucial in identifying why the economy is in this condition, and figuring out what can be done to improve this. 

So, among these 4 factors, how many are the government’s fault? How much is Modi to blame for these? Let’s see. A major chunk of reduced business can be traced back to the fact that money laundering has reduced severely. Can Modi be blamed for that? Was ending corruption not one of his promises during the 2014 election campaign? However, one has to admit that his decisions are often not fully thought-out, and leave a lot of things unconsidered. While black money and tax evasion has certainly seen a decline, there has been a growth in unemployment rates due to a failure of many industries.

So, who is really at fault here? Modi? Or those with crores in black money? You decide.  

-NK