This economic slowdown comes at a time when crude is a benign $55-$58 a barrel, and world economy continues to grow modestly. So in a very broad & general way, for instance you were sitting in Mars & looking at it, why did the economy slow down?
Apart from the twin deadly blows inflicted by way of demonetisation & GST that disrupted the growth momentum what has caused aggregate demand to shrink? Remember it is lack aggregate demand that bedevils the economy. So let’s take a look at what’s been happening to demand.
As the NSO spending survey shows, both urban & rural spending by households has shrunk but the shrinkage is largest in rural spending. That should not be a surprise. Because rural incomes, have barely grown by 1% pa over the last 6 years under Modi ji. That’s the crunch point.
Why has growth in rural incomes shrunk to 1% when the GDP is growing at 7%. Why is there such a large discrepancy between the two numbers? The answer lies in [a] inadequate growth in food procurement prices that shrinks farmers’ income, [b] throttling of MNREGA that eliminates the floor under rural wages and causes incomes of the landless labour to fall sharply and  jobs destroyed by a combination of demonetisation + GST + disruption of land monetisation following RERA plus the other factors listed here.
In short, all three engines that drive growth, jobs and incomes in rural areas have been shut down by thoughtless policy measures. We have nobody to blame but ourselves. It is deliberate policy. Over & above this is the matter of selective inflation targeting.
It is a hallmark of all BJP Govts to clamp down heavily on food inflation by hook or crook. This is achieved by a variety of policy measures that include lower increases in food prices, slower procurement in Agricultural Produce Market Committees (APMC) to beat down prices & a few other non-monetary measures.
This policy has great support from the trading class in APMCs. It doesn’t require much from the Govt except for a wink and a nod. Over and above this, we have been blessed with good harvests over the last 5 years which instead of boosting the economy, have actually crippled it.
What happens when a business makes a lot a widgets that nobody will buy? At the firm level, the business goes out of business but what happens to the economy? A lot of resources – capital, labour, material – used to make those widgets goes waste generating no income.
The same thing has happened over last few years in agriculture. We have produced mountains of wheat, rice, sugar etc that nobody wants to buy, either in India or abroad. The Govt has borrowed about 3 trillion from banks to warehouse this mountain of food.
On a very rough estimate, we have taken about 2% of our GDP and buried in the sand where it can contribute nothing – nothing – to our current or future growth. It is what you call a dead investment. How can an economy afford such colossal waste of resources and still grow?
Moral of the story is that in variety of ways, policy measures have taken away income from the rural areas and this has had a cascading effect up the value chain in the economy. Unless you reignite growth at the bottom of the income pyramid, growth won’t return.
The second lesson is that we can’t be building mountains of useless food and still expect to grow, especially in rural areas. We have reached the absolute limit to growth by that strategy. The more you invest in Agriculture, the more you lose. Why? No exports are possible.
The world was short of food a decade back because of 2 reasons. Firstly, frequent failures of harvest in communist countries. These failures are now a thing of the past with reforms. Secondly, Africa couldn’t grow enough food because its Agriculture was primitive. Not so any longer.
Indian strategy in Agriculture and rural incomes has always looked to production only, vaguely assuming that anything produced will be eventually sold. Over last 2 decades that is no longer true. Food Corporation of India writes off mountains of food lost to rats every few years. So that has to change.
We need a completely new growth strategy for Agriculture, rural incomes, urbanisation etc etc. The old one has reached a dead end. It would be idiotic to continue as we are. This also may be an appropriate to look at water, land use, urbanisation & rural infra & all subsidies.