Demonetisation followed by faulty GST led to this slowdown: Manmohan Singh

The first step to fix it is to acknowledge that there is an economic slowdown, says the former Prime Minister

Former Prime Minister Manmohan Singh believes Indian economy is facing a slowdown, which is both structural and cyclical in nature. In an interview with Hindi daily Dainik Bhaskar, he said the first step towards addressing it should be to acknowledge the fact that we are facing a crisis.

Saying that India was able to successfully handle the 1991 and 2008 crisis despite not having a mandate as big as that of the present government, Singh said the government needs to stop the habit of headline management and start engaging with experts and stakeholders to find a way through the problem.

The former PM suggested five measures to revive growth:

1. Rationalisation of GST, even if it leads to loss in revenue in the short term.

2. Focus should be on increasing rural consumption and reviving the agriculture sector. He said government can take clues from Congress manifesto, which lays down several measures in this regard to free up agri markets.

3. Liquidity crisis needs to be addressed. He said that not only public sector banks but NBFCs also get cheated. 

4. Looking for ways to revive major job-generating sectors such as textile, auto, electronics and also subsidised housing.  He said easy loans need to be provided for this purpose, especially to MSMEs.

5. Government needs to identify new export markets opening up due to the ongoing trade war between US and China.

Further, Singh said government needs to address both structural and cyclical problems to get back to the high growth rate in 3-4 years.

On economic slowdown

He called slowdown in truck sales especially worrying as it indicated a slowing demand for goods and essential commodities. He added that in his estimation, it will take a few years to come out of this recession provided the government now acts wisely.  

On demonetisation and GST

The crisis has been caused by a lack of cash, he said. India has a substantial informal economy that runs on cash. A large part of this consists of legitimate activities, which are outside the purview of the tax threshold and therefore should not be considered part of the 'black' economy. This was affected by disappearance of cash from the system, he added.

He said that while the GST was introduced in a hurry while the economy had not yet recovered from the ill effects of demonetisation. He said, while they supported GST, it was poorly implemented.

On merger of public sector banks

Merger of PSBs can help streamline and strengthen the banking sector but is it the right time for this, he asked. Instead of focusing on increasing cash flow and reducing NPAs, bankers focus will shift to integration, he argued. Calling it a complex process, he said, their difficulties will increase in the absence of a clear, strategic plan for these mergers during the transition period.

While the government is trying to merge weak banks with strong banks, it is possible that weaker banks might pull down stronger ones due to their weak balance sheets, said the former PM. The weakness of these banks will thus extend to anchor banks, he added.

On financial policy and economic management under Modi govt's first term

Demonetisation and GST are the permanent legacies of the Modi govt's first term, he said. While inflation has been brought under control, it has been done at the expense of the agricultural sector. The govt was slow to deal with the NPA crisis and that has now affected NBFC sector too. Calling the Insolvency and Bankruptcy Code an important structural reform, he said it does not benefit the vast MSME sector at present.

The former Prime Minister also spoke about the Modi govt aggressively taxing petroleum products. He argued that had benefits of lower crude prices been passed on to consumers, perhaps the slowdown could've been avoided.