The only way to truly save our economy is to decrease our dependence on products and goods from foreign countries. At the same time, it would be quite nice if we make other foreign countries dependent on us for their goods and services. Going by this simple logic, a brave idea was born and a valiant attempt was made early on to encourage local manufacturing: Make in India.

Encourage Indian industries to manufacture more in India, encourage them to export more, attract more foreign companies to set up manufacturing units here so that we rake in all the $$$. In turn, because of the industry expansion, there would be many new jobs!

Did it work? Well, not so much.

Gross Domestic Product Growth = Down

Manufacturing Index = Down

Industry Growth = Down

But there’s a reason for all of this: Raghuram Rajan.

Ok maybe not him personally but he did initiate a sequence of events that put this government in an uncomfortable cringeworthy position. This grand plan of Make In India requires one vital thing: Capital.

Without extra paisa no industry can honestly be expected to grow, increase manufacturing and add more jobs. This extra capital comes in the form of loans. Loans which banks are unwilling to provide at the moment.

This April, credit growth (meaning, rate of giving out new loans) plunged to a 60-year low. Why? Because back in the UPA fun times, a bunch of large business people took high-value loans from public sector banks and have been unable to pay it back. Some are willful defaulters while others are suffering due to bad business performance. These bad loans kept growing and growing at an insane pace ever since Raghuram Rajan ordered a bank cleanup.

Rajan said to the banks, “No excuses. Clean up your balance-sheets.”

Banks, at present, seem to be worried that skeletons will tumble out of the closet about how these loans were given in the first place. So they aren’t risking giving out new ones. A deadly combination of these two factors and a virtually stagnant banking sector is leading to the current economic slowdown.

On top of this, demonetisation happened. Followed shortly by Goods & Service Tax implementation.

Shocking the system = #EpicFail

Back in April 2015, our PM said that he’s an Economics ‘novice’.

During his campaign, people often remarked how he ran Gujarat like a business when he was the CM. He created a friendly environment for businessmen to setup their shop in his state (Gujju-style). His whole, ‘I will give you Vikaas’ campaign was based on the way he handled things in Gujarat and how it worked.

But being a PM and recreating the same across the country is a difficult task. This is evident from how, on November 8, 2016, Modi declared, “I’m taking away most of your currency, OK? It’s for your own good, OK? OK.”

Society doesn’t react well to shocks. Only people undergoing major psychiatric therapy are given shock treatments as a form of cure. Even that practice is now becoming outdated. One way to look at this would be that Modi assumed everyone, everyone, is crazy corrupt and needs this shock treatment. Right from the gold-laden Bappi Lahiri-types to the farmer who is struggling to make ends meet and contemplating suicide. In one swooping motion initiated in November, 2016 they became suspects in the eyes of the government.

“Everyone is guilty until proven otherwise.”

Our prime minister and his government are good at one thing though: Selling. They sold the idea as if it was a cure for everything from cancer to the annoying Airtel 4G girl ads.

A lot of people bought his pitch too and continue to buy it. But the nation’s economy can’t be run like a business. It needs long-term planning. It needs the proposed ideas to be debated and deliberated and views need to be sought from stakeholders who get affected by these policy decisions the most.

Businesses can afford trial-and-error but when a government tries to do that there are very real human costs to pay. As predicted by experts-who-think-long-term (Uhh… Economists?), our GDP growth rate tanked after demonetisation. 99 per cent of the demonetised currency came back.

Now demonetisation is being sold as a way to increase the tax base and for the government to catch those people who weren’t paying taxes. “We have a lot of data on these crooks now,” says the Gormint. “We are coming after them and making sure they pay their taxes.”

Sure. Good move. Government needs more money at any given point of time. But this whole tax collection scene depends on the assessment of incomes of various people, a process which might take years to bear fruit. As it is, the Income Tax department is severely understaffed to handle this workload.

Speaking of increasing the tax base, Goods and Service Tax is supposed to do exactly that. In fact, it would be more effective than something like demonetisation because:

(a) It’s been thought through and gone through a lot of consultation over the last decade.

(b) The assessment would be aided and completely handled by its tech backbone – GST-Network; and,

(c) Unlike Income Tax, everyone has to pay GST because it’s an indirect tax.

But the timing and manner of implementation is completely messing things up. Even before the business folk could recover from the demonetisation shock, GST was implemented messing things up even further. On top of that, the GST-N has a tonne of glitches and can’t handle the load of a large number of people filing returns at once. Our finance minister is now asking people to not be lazy and file their returns earlier.

GST is going to cause a lot of short-term pain. It might lead to good things in the future when the bugs get sorted and the technicalities are smoothened out. But till then, prepare for the worst.

The market bubble

For more than a year, many observers of the market have been scratching their heads about why Sensex and NIFTY have been showing major upticks when the economy is clearly suffering due to these back to back shocks.

Say what you will about the market, one thing is certain: It’s not going to go up forever. It’s going to come down crashing someday, one day and, perhaps, really soon. That is the natural way of things. In 2008, we saw how the market suddenly went belly up due to the misadventures and shadiness of a few banks in the USA. It caused a global ripple effect but India was more or less unaffected.

Why? Because most of our economy was based on the informal sector. Cash saved us.

That was 9 years ago. Now, the picture has completely changed. While demonetisation has practically destroyed a large part of our unorganised sector, GST was a move to promote the organised sector more. The effect of this is we, as a country, are getting more and more entangled in global markets.

Mark my words: If the crash comes, when the crash comes, it would be a scary scenario. I just really hope it doesn’t happen anytime soon because at this point our economy is already ducking down in the trenches and shooting blindly at the approaching self-created monsters.

So what do we do now? Is there any way out of this quandary? Maybe there is.

First thing is to clean up the bad loans as fast as possible and then restart the investment cycle domestically. That, unfortunately, is an extremely complicated process. After that is done, all the government can hope for is our industries will resume growing at a rapid pace and continue adding more jobs. But for that to happen, we need time. We also need to keep hoping that the government doesn’t make any more shocking moves in the near future, probably till the time GST stabilises and becomes a part of our lives.

I don’t think that’s too much to hope for. Is it?

(This post is inspired by Puja Mehra who wrote “Crash-landing the Indian Economy”. Do give that a read too.)

The author can be contacted on Twitter @Memeghnad.