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'If tax-and-spend was expected to trickle down, it has failed; India's rural wages are stagnant, which has wrecked consumption growth,' points out Debashis Basu.
Many people seem to be bewildered by the sudden slowdown in India's economic growth.
But had you kept your gaze firmly fixed on India's policymaking, the slowdown would hardly be surprising, let alone inexplicable.
Since public memory is short, here is a quick recap. For the first few years of Prime Minister Narendra Modi's tenure, India's economic policy was largely incoherent.
India went through two Reserve Bank governors and a finance minister who didn't exactly set the Yamuna on fire.
The government's main focus was on a bunch of social schemes: Swachh Bharat, Jan Dhan, Digital India, Beti Bachao Beti Padao, Suraksha Bima, Jeevan Jyoti Bima, Atal Pension, Namami Gange, Soil Health Card, etc.
These, and the 'economic' schemes of that period like Make in India, Skill India, MUDRA loans and Startup India, were all heavy on slogans and propaganda but the impact on the ground was not game-changing.
With the economy continuing to hobble along (from the previous regime's missteps), the coup de grace was the demonetisation of high-value currency notes in November 2016, which devastated millions of small businesses and 1.5 million jobs.
Then came the poorly planned and hastily implemented goods and services tax (GST).
These two moves wrecked supply chains and hollowed out the economy in the adjustment period.
By 2019, every economic indicator was flashing red: Rising unemployment, poor export growth, punitive tax rates, tax terrorism, an imploding public sector, and a collapse in the gross domestic product (GDP) growth rate to 5 per cent (effectively 3.5 per cent under the old calculations).
Manmohan Singh, who had been the constant butt of Mr Modi's jokes, gently pointed out that nominal GDP growth was at a 15-year low, household consumption at a four-decade low, unemployment at a 45-year high, bad loans of banks at an all-time high, growth in electricity generation at a 15-year low, and so on.
Businessmen were restless. T V Mohandas Pai, a vocal advocate for nearly every policy of the current administration, did not mince words when he sounded the alarm.
'Tax terrorism has gone rampant. The compliance burden has increased massively. There is a fear psychosis,' he lamented.
'There's a prevailing belief among government officials that all businessmen are crooks and must be pursued.'
His grim assessment of the business climate echoed across India's corporate corridors: 'I have never seen mood and morale so down ... Businessmen have given up hope.'
The late Rahul Bajaj, a titan of industry, was blunt: 'There is no demand, and no private investment. So where will growth come from? It doesn't fall from the heavens.'
A M Naik, then head of Larsen & Toubro, suggested that India would be fortunate to achieve even 6.5 per cent GDP growth.
More tellingly, Mr Naik cast doubts on the reliability of the official data, remarking that the 'situation is challenging on data credibility'.
A panicky government enacted a drastic corporate tax cut in September 2019, hoping to spark investment and job creation.
Grateful businessmen held onto their tax savings because of weak demand rather than reinvesting them.
And then came the pandemic, which dealt a further blow to a weak economy.
The data shows that growth between 2014 and 2022 -- a period marked by the same prime minister and two finance ministers (not counting the interim stints of Piyush Goyal) -- was driven almost entirely by government borrowing and spending.
Indian households and businesses contributed a negligible share of this growth.
The economic rebound following the demand compression was sharp, and with the stabilisation of the GST system and improved tax compliance, government revenues surged.
Capitalising on this windfall and adding massive borrowings to the pot, the government decided to go all in.
Budget 2023-2024 announced a massive capital outlay of Rs 10 trillion, which was increased to Rs 11 trillion in 2024-2025, to be spent on railways, roads, urban transport, waterworks, energy transformation, and defence production.
The heavy hand of the State has rolled the dice of growth with a tax-and-spend model for two years now.
Yet, in a society where the rule of law is weak, corruption is rampant, and red tape is entrenched, limitations to this strategy are obvious.
Also, if tax-and-spend was expected to trickle down, it has failed; India's rural wages are stagnant, which has wrecked consumption growth.
Given that government expenditure has been the sole driver of growth -- with neither private capital expenditure nor household consumption contributing meaningfully -- when government spending slowed in FY25, the inevitable deceleration in GDP followed.
As I said, the slowdown is neither surprising nor inexplicable.
This, then, is the summary of Indian policymaking over the last 11 years and its impact.
Debashis Basu is editor of moneylife.in and a trustee of the Moneylife Foundation/
Feature Presentation: Aslam Hunani/Rediff.com
