With the economy in dire straits, it is up to Arun Jaitley to turn it around or face the axe

India never debated its economy so seriously in the past two-and-a-half decades as it has in 2017. There is not an iota of doubt that the condition of the Indian economy was far better even during the 2008 financial crisis than it is today.

Our GDP growth has nosedived for six straight quarters. Growth in industrial production is hopeless; exporters are beating their chests; farmers are committing suicide and the Information Technology and other service sectors are no longer a young graduate's dream destination.

This explains the admonition being recieved by Finance Minister Arun Jaitley not just from the Opposition but also from within the party (read Yashwant Sinha and Subramanian Swamy). It is no more a political squabble, people are baying for Jaitley's blood. This is because they believe that the current financial crisis is a result of his cognitive closure towards the problems he inherited from the previous regime.

What options does Jaitley have?

Over the past few days, there have been rumours and suggestions galore on the kind of policy decisions Jaitley may or should take to resolve the mounting crisis.

One of the rumours is that the government is coming up with a stimulus package. Some media reports put an amount of Rs 50,000 crore to this proposition. The amount, if announced, would make it 0.41% of India's gross domestic produce (GDP).

The fiscal deficit will hit 3.61% of the GDP in 2017-18, much higher than the government's target of 3.2%.

In the first five months of the financial year, the Centre has already touched 96.1% of the budgeted fiscal deficit target. The fast-paced expenditure on behalf of the government shows how badly economic growth is dependent on government expenditure. But will Jaitley's pockets allow him to spend more money than he wanted to spend at the time of budget this year?

NC Saxena, former member-secretary of the erstwhile Planning Commission says, “The government can certainly spend more money, but it would be a disaster. It will make the foreign investors exit the stock markets and the rupee will crash. Government's debt will rise and the cost of funds will rise. It will also impact corporate houses that want to borrow money.”

Saxena also adds a pertinent question, “Does the Indian economy have the capacity to absorb a stimulus? Where will the government spend? If it spends on infrastructure, where will the land come from? What about environment approvals for projects? Infrastructure expenditure has its own problems. It does look like an easy way out to push the economy but in reality it is not easy to get the desired results by investing in the sector."

There is another serious problem that handicaps the government in taking a decision on stimulus.

“We are not sure what the revenues would be like. The Goods and Services Tax (GST) has not taken off well, and there is a decline in advance tax receipts from businesses. We have to wait till we get the final figures to take a call on stimulus. We are not denying its possibility, but we have be sure of our resources,” a miffed government official said, on being questioned on the possibility of a stimulus.

So what then?

Maybe a cut in the interest rates for the corporate sector borrowings?

The newly formed Prime Minister's Economic Advisory Council has economist Surjit Bhalla as its part time member. He is a votary of low interest rate regime.

In an article published in September this year, he argued: "In most countries (strike that and replace with all countries except a unique country called India) the above question has the same answer — look at interest rates, stupid. No matter what country you go to, central bank and government officials have the same answer and the same policy: If you want to increase demand (up the GDP growth rate), decrease interest rates; if you want to decrease demand, increase interest rates. Why Indian macro-experts almost never offer this policy is a question I can’t answer — a psychiatrist might do much better.”

Bhalla would love an Indian version of quantitative easing. But since India does not have the power of the US dollar, his recommendations require the Reserve Bank of India's Monetary Policy Committee to forget inflation-targeted monetary policy in the country.

Let's assume the RBI does that. Interest rates are reduced by, say, 200 basis points. Will growth pick up?

Pronab Sen, India's former chief statistician, says, “Indian banks are not willing to lend money to any big corporate house that has defaulted on loan repayment. There is a huge amount of bad loans, and the banks are just not willing to lend to corporates the way they did earlier.”

Credit growth plunged to a six-decade-low of 5.08% in the financial year 2016-17, not because the interest rates are at record levels, but because banks are sitting on non-performing assets worth Rs 8 lakh crore.

The trust between the banks and the industry is at an all-time-low, especially because there is a talk of holding someone responsible for the current mess. The industrialist has a bankruptcy code to save him from harassment, the banker held guilty of approving risky loan will be on his own.

Is there no light at the end of the tunnel?

According to Ravi Srivastava, professor of Economics at Jawaharlal Nehru University, there is. “The current problem is a blend of policy measures gone wrong and worsened by global factors. While we can't do anything about global reasons, back home there is a need to set policies right. Demonetisation and GST have stifled the informal economy in the country. The government must target its policy at reviving demand at the bottom of the pyramid.”

The latest commentary from Centre For Monitoring Indian Economy (CMIE) on the Indian economy, too, identifies the anaemic demand in the Indian economy as the root cause of slowdown.

CMIE’s Consumer Pyramids Household Survey captures falling consumer sentiment in the Indian economy. “The index fell from around 100 in April and May 2017 to around 96 in June and July. In further fell to 94.5 in August.

“Transitory disruptions caused by GST only add to the hurdles to a revival. But, neither GST nor de-stocking is the main cause for the fall in the growth in manufacturing GVA. The main problem is a secular decline in the growth rate since its recent peak in December 2015. This declining trend was only exacerbated by the supply-chain disruptions caused by demonetisation and the initial confusions in the introduction of GST.”

The commentary counters Bhalla's assumption on troubles induced by high interest rates, too. It says, “We know that there are no new supply hurdles from traditional sources. Government efficiency is high, electricity availability is at its best in recent times, there are no raw material availability constraints such as in gas or iron ore or coal, etc. Interest rates have not been rising and the direct tax regime has been benign.”

It further says, “Industry has sufficient slack capacity as is evident from the 74.1% capacity utilisation seen in RBI’s OBICUS surveys.”

Of revolutions and reigns of terror

The French Revolution changed the lives of millions. But it also unleashed a reign of terror.

Demonetising 86% of currency in circulation to kill the black economy was revolutionary, but introducing a loosely envisaged GST within eight months of demonetisation is akin to unleashing reign of terror.

Millions are suffering for lack of jobs and loss of business. The critics of this reign of terror are looking for a Robespierre in Jaitley. His trial has begun. Let's hope he turns things around and saves his job from the guillotine.