Demonetization followed by flawed GST led to this slowdown: Manmohan Singh

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

Saying that India was able to successfully manage the crisis of 1991 and 2008 despite not having as large a mandate as the current government, Singh said the government needs to kick the habit of managing headlines and start engaging with experts and stakeholders to find a way through the problem.

The former prime minister suggested five measures to revive growth:

one. GST rationalization, even if it leads to short-term loss of revenue.

two. The focus should be on increasing rural consumption and reviving the agricultural sector. He said that the government can take clues from the congressional manifesto, which establishes several measures in this regard to free agricultural markets.

3. The liquidity crisis needs to be addressed. He said that not only public sector banks but also NBFCs are also cheated.

Four. Looking for ways to reactivate the main employment-generating sectors, such as textiles, automobiles, electronics and also social housing. He said that it is necessary to grant easy loans for this purpose, especially to MSMEs.

5. The government needs to identify the opening of new export markets due to the ongoing trade war between the US and China.

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

On the economic slowdown

He called the slowdown in truck sales especially worrying as it indicates a slowdown in demand for goods and commodities. He added that in his opinion it will take a few years to get out of this recession as long as the government acts prudently.

On demonetization 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 scope of the tax threshold and therefore should not be considered part of the shadow economy. This was affected by the disappearance of cash from the system, he added.

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

On the merger of public sector banks

The PSB merger may help streamline and strengthen the banking sector, but is the time right for this? he asked. Rather than focus on increasing cash flow and lowering NPAs, bankers’ focus will shift to integration, he argued. Calling it a complex process, he said, its 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 will bring down stronger ones because of weak balance sheets, the former prime minister said. The weakness of these banks will thus spread to the anchor banks, he added.

On financial policy and economic management under the first term of the Modi government

Demonetization and the GST are the permanent legacies of the Modi government’s first term, he said. Although inflation has been controlled, it has been done at the expense of the agricultural sector. The government was slow to deal with the NPA crisis and that has now affected the NBFC sector as well. Qualifying the Bankruptcy and Insolvency Code as an important structural reform, he said that it does not benefit the vast MSME sector at present.

The former prime minister also spoke about the Modi government aggressively taxing petroleum products. He argued that if the benefits of lower crude prices had been passed on to consumers, perhaps the slowdown could have been avoided.

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