Why India's Goldilocks Economy is Trapped in 'Invisible Spectrum' of (Un)Reforms

There’s a critical dichotomy – India’s macroeconomy is appearing to be in a Goldilocks embrace.

(Photo: Kamran Akhter/The Quint)

I am delighted that Prime Minister Narendra Modi has slashed taxes in our consumption economy. Earlier, in February, he gifted nearly Rs 1 lakh crore ($12 billion) in waived income taxes to 40 million salaried employees. That was expected to kickstart a shopping spree, but there was no discernible upswing.

Less than six months later, he rationalised incidence, simplified administration, and hacked the Goods & Services Tax (GST) rates by nearly ten percentage points on a slew of products, from food to insurance policies to luxury cars. This giveaway is nearly Rs 1.8 lakh crore ($20 billion). Together, his tax magnanimity could add up to nearly one percent of the GDP, which is a terrific stimulus.

But there’s a critical dichotomy – India’s macroeconomy is appearing to be in a Goldilocks embrace. General inflation is only two percent, while food prices are declining.

The fiscal deficit is trending down, even as government capex has vaulted over three percent of GDP, the highest ever, at Rs 11 lakh cr ($130 billion) in the current year. Interest rates are softening, and there’s a twin balance sheet bonanza, as banks have shed bad loans and corporates have deleveraged. The stock markets are at a hefty premium to most competing economies.

If things are so good, what compelled the government to give an emergency mid-term tax break?

Because the feel-good factor is missing. Why? Because two of the most vital parameters – vis-a-vis private investment and personal consumption expenditures – have been stubbornly flashing red for years.

Private capex has fallen 0.6 percentage points of GDP below the pre-Covid level, while household consumption has shed three percentage points. M/s Modi & Sitharaman have vigorously tried to exhort, cajole, plead, even mildly threaten, but India’s private producers and consumers have remained unmoved, Sphinx-like stalling.

Why is Goldilocks So Anxious?

Many experts and political commentators have trotted out several reasons for this strange phenomenon - the economy is apparently strong, but its cardiac rhythm, its private ventricles, are weakening. The explanations have stayed narrowly theoretical and predictable – global uncertainties, tariff tantrums, high household debt and lower savings, high borrowing costs, tight liquidity etc etc etc.  

I believe everybody is missing the woods for the trees. Because the answers lie in the “invisible spectrum” of reforms, ie, those economic impulses which are not visible in any gazette notification or press note or budget speech. These powerful actions/reactions remain invisible because the victims dare not protest, the perpetrators act in shadows, and everybody is complicit in a conspiracy of silence. Yet, their impact is tectonic.

Here are two devastating stats that are not quoted too often: India’s Net Foreign Direct Investment (FDI) has fallen by nearly 97 percent, to a shocking $353 million last year. Why? Because Indian investors are taking as many dollars out of the country as foreigners are bringing in.

Now, combine this with another deadly stat – over the last three years, nearly 15,000 dollar-millionaires have permanently migrated from India. Their wealth could range from a minimum of $1 million to over hundreds of millions of dollars. Let me assume an average wealth of $10 million per migratory high-net-worth individual (HNI).

That’s a wealth outflow of $50 billion every year! Add these up, and you are looking at a stunning outflow of $150 billion – equal to roughly four percent of GDP – every year!

If this $150 billion had stayed, it would have created a consumption and investment multiplier in India, not overseas. Since capital and consumer purchases, both, are leverageable, it could have created up to $300 billion of additional demand in the economy, who knows? Alas, that capital has either flown the coop or been sequestered in safe financial investments, to be steadily remitted out to the new home of the migrants.

Bans, Judicial Orders & Tax Disputes – the 'Invisible Spectrum' is Deep!

Here's another debilitating “un-reform” buried deep within the “invisible spectrum” – our tendency to ban! As soon as our government sees a tiny trespass, a small but shocking violation of the law, it slams the kill-switch for everybody, crashing the large, legit business along with the fringe illegal one. The good guys and the bad guys are punished equally!

You don’t believe me? Well, a few people were using inflated equity valuations to launder money, but we slapped an angel tax on every premium investment, effectively outlawing the venture capital industry. 

Some guys were using cryptos to trade on the dark web, we obliterated the entire blockchain, taking India out of an exciting digital future.

A few thousand addicts were going bankrupt in reckless gaming, we poured kerosene and burnt a gaming industry worth billions of dollars, chucking another booming digital opportunity.

We don’t benchmark our regulations to global standards, we don’t monitor to control excesses, we don’t catch the culprits – we just ban everything for the good guys!

In that process, we destroy humongous amounts of wealth, throw hundreds of thousands out of jobs, freeze the growth of promising future industries …and lower private investment and personal consumption. 

I can go on and on. Our judicial orders on commercial issues are often passed by judges who may not have the required knowledge and competence. Just look at the egregious order our Supreme Court passed in Bhushan Steel. A company was successfully rescued from bankruptcy. The buyer paid thousands of crores to banks to settle the rogue debt. Thousands of jobs were saved. A struggling operation was merged into a healthy one over three years. The court ignored all these facts and ordered the liquidation of the acquired asset.

Liquidate! Unwind all the good work. Re-destroy a convalescing business.

Mercifully, the Supreme Court saw the folly in its own order, and rescinded it. But who knows how many such self-destructive judicial orders go undetected, uncorrected, wreaking havoc on India’s private investment and personal consumption economy.

Then there are unending tax disputes, dug up from decades ago. Volkswagen made a $1.5 billion investment; it’s slapped with taxes and penalties of an equal amount for an “offence” allegedly committed way back in 2012. If it was such a huge evasion, why was it not caught in earlier audits? Since it’s a marquee case, it grabbed headlines. What’s truly soul-crushing are the millions of infractions that thousands of honest entities must deal with.

I guess you now understand why Goldilocks, instead of being euphoric, is anxious. She can’t figure out why India fails to deal with the “invisible spectrum” of reforms, why there is cardiac arrhythmia in the private investment and personal consumption sectors of India’s economy.