 Hello and welcome to NewsClick. Today, we are going to discuss the downturn of the economy and has it been caused by the millennials not wanting to buy cars as the finance minister, Nirmala Sitaraman has said. Somebody else has pointed out that we seem to be dipping in terms of sales from biscuits to booze to bikes. Is it also the millennials don't want to buy bikes as well or biscuits? It appears that they also don't want to buy booze. One would have imagined that they probably take Ola cabs once in a while with the laws that there are for traffic. So if booze is going down, biscuits are going down and this entire thing is at best a spin and we know that the data shows that millennials want to buy cars because they are buying used cars. So essentially this is shall we say headline management. I think Manmohan Singh has called this that the government should spend more time with the economy than managing the headlines. Would you say this is another of those exercises? Well, they have obliging media to oblige them and pass on a certain kind of create or manufacture consent and therefore when you have that kind of an obliging media out there, a compliant and pliant media out there, why wouldn't you manage headlines? I think that it's great that you say something and then it comes out exactly in the same fashion. You know when you say manufactured consent, I think you're being too kind. Yes. We at the moment are not manufacturing consent. We are actually manufacturing myths. Absolutely. That the mythology is not just about the past but the mythology is about the present as well and the economy is a classic example of that. We managed to shall we say tweak the GDP figures by changing the baseline as we know for a lot of issues. But you can do it only once. You can show that now we have gone to a new baseline which shows that the past three years we did better than anything else that happened earlier. And what happened is that it pushed up Chidambaram's performance as well. I mean that was one of the side effects of trying to do that. So now of course he has to be put where he is in order to shall we say diminish the cluster. But you know the point that they're making is you can do this once. But if you do it, if you look at it in a longer time frame, finally the trend cannot be hidden because one time repair shall we say of this kind cannot go into a long-term change because ultimately the baseline can shift but it cannot change your trajectory. Is that what we're seeing now? I think that not just the data, the data manages headlines as you said and that data can very easily be questioned because if you remember I think the Prime Minister's advisory council came out with a report in which it gave the back series and that report was deleted from the website and it was said this is not official and a new back series was released which showed lower growth in the previous years than what was shown by the Prime Minister's advisory council's own report. And so there is that headline management which quickly therefore disappears because journalists are not doing the job, they're not asking the questions and they're actually propagating what the government wants. But at the end of the day if people cannot buy biscuits, if people are not buying cars, if they're worried that the next day when they go to work, if their boss tells them that you have to stay till 12 at night and they say, no I can't because my child is unwell, they can't say it anymore because they're scared that they'll lose their job. So no amount of headline management, no amount of numbers management is going to change that feeling that people have at this moment. Well that headline also said, the economic times headline you've talked about, I think you said of the Germans, also talks about bikes and briefs. They are really far more fundamental. Absolutely. And it does also show not only the automobile sector which of course is the key sector being hurt partly because from cycles to trucks all of this is fallen but if you look at for instance housing, now that has taken a huge hit. That takes a hit that steel and cement take hits and these are the key sectors of the economy. Now in this it's clear the demonetization really killed the informal sector or deeply damaged the informal sector. Absolutely. And this is also now becoming much more visible. Absolutely. I think one of the things that just to go back to the point that you made about briefs and bicycles and biscuits. Another economic columnist Andy Mukherjee of Bloomberg he I think mentioned on social media or probably he wrote about it how toothbrushes, the replacement of toothbrushes that cycle has increased. So people are not replacing toothbrushes. There is more data to show that people are moving from higher branded soaps to smaller soaps. So everywhere this is happening. Toothpaste is not selling. We know that the phenomenon Baba Ramdev of Patanjali. What has happened to him? His urban sales this year is negative. Growth is negative. Rural sales growth is half of what it was last year. So I'm saying all over we see that FMCG fast moving consumer goods it's declining. Last quarter in their investor call Hindustan Unilever actually said that they use what is called the R word, the recession word, which no one in the stock markets wants to hear. And they said that we are slow down proof. I think they said we are recession resistant but not recession proof. Now why would they go out and use that word unless they're feeling the pinch? Coming back to the point that you raised about housing. Now we know that what housing does is that it creates it's one of the biggest generators of employment. Bad quality employment. It's not as if it's great quality employment. We know how workers in the housing sector actually live exist. But it's still employment especially for people who in the non-harvest or the non-sewing season do not have work. Seasonal workers. So they come, they work, they get money and then they send part of that money. They also do things which are kind of invisible. Like for instance there's a house that was being built opposite my house and every morning I used to hear these Bhojpuri songs. And because there are options available you can actually buy a sim only to listen to songs. So people would buy multiple sims when they came to the city. They would make long distance calls, they would buy sims to just listen to music or to watch YouTube on their phone because that's the life that they lead. When they go away what happens? That also collapses. Forget about the guy who was sitting there selling tea in the morning or bread and an omelet to the workers out there or makes rotis and sells them in the evening. That guy is dead too. I mean that business is dead. We know that after demonetization across cities you would see vendors having shut shop and gone. CMI's report actually showed a drop in unemployment. This is interesting because as we know unemployment is a function of labour force participation rate. So as Mahesh Vyas wrote that the amazing thing is that unemployment actually dropped after demonetization because people left. They were no longer participating in the labour. So they were not looking for jobs. So if out of 100, earlier 50 people were looking for jobs and 42 were getting it. Now 40 are looking for jobs and 38 are getting it. So it looks like the unemployment rate has gone up but actually people are just so, the conditions are so dismal that they've left and this actually probably started earlier but definitely demonetization is a kicker which really affected the rural economy because people who would come to urban areas didn't have jobs and they went away. It had a great political dividend for the BJP but... Yeah because it was felt that this is a real strike against black money and it took people three years to realize it wasn't. By that time the narrative had changed to Pakistan and so on. So you could tide over that to surgical strike. Even in 2017 in the UP elections there was a benefit because what it did is that in an Indira Gandhi-esque fashion, Narendra Modi was able to project himself as in fact he said that he used exactly the line that Indira Gandhi had used. So it was in fact at that point of time it was really felt that he's done such a grave, he's taken such a grave step, inflicted so much pain on us. It must be in the long run... Good for the... ...dividend of the nation and they're willing to... And maybe there was a bit of a shudder for it as well. There's been so much inequality that has developed over a period of time. There is this argument that the rich are suffering also. So that has been argued that that was there. But without that I would say the basic thing was that they felt this is a strike against various things like hoarding cash, black money. People believed black money was money. They did not really believe that black money was gold, or property, exactly. Or in a bank, or actually in a bank. And as we know now the black money strike didn't lead into anything. But nevertheless it made people feel at that time that something was going to happen which hasn't. But it did affect the informal economy greatly. And that has the consequence we are seeing today in terms of its negative fallout on the economy. So I would actually say that even more than demonetization it's actually GST which has had a worse impact. In fact demonetization we know within one year more or less the cash was returned into the system. And there is an informal arrangement that happens in the rural areas. Definitely. I know some of my friends who are essentially grain traders. One of my friends, his family is a grain trader. He is a journalist but his family is a grain trading family. So I said that how is demonetization affecting informal credit systems? Credit systems existed. And at times like these actually there's an informal, I would say what would be called a moral economy that comes into play. Yes, there's an exploitative relationship. It's not as if it's... But it's still, though cash is not a big exchange, there is still an exchange of good reserves. But what GST has done is essentially, what GST has done is essentially killed the small entrepreneur. You know this is something which people haven't really understood. And I think I would like you to explain this a bit. What it has done is that circulation of money that a small person makes, that has been held up because it's now, if it takes say for instance three cycles for him to realize back his GST benefit, that means a huge part of his working capital is locked up in the GST payments. And that is not a net loss but it's a loss of his circulation. It's essentially exactly what you're saying. Now the interesting thing is again, that it's not the small entrepreneurs who have been affected by that. There are a lot of middling, people who actually probably make one or two crore rupees in terms of their retained profit a year. I'm not saying their income, personal income, but basically what happens is that GST makes you pay taxes in advance or every month, even if it's not in advance every month. Now what it does is that you realize the input credit that you have is refunded to you after 60 days. And we know that it hasn't been refunded at all, which is why the finance minister has in this budget and later in her mini budget said that we'll return it in 60 days. That means it wasn't returned. So working capital has actually been, I mean there are people in the stock markets, great votaries of this government who have said that all we need is the government should return the money, that it is locked up in GST. It's been locked up for six, seven, eight months. Now imagine that if you've paid, I was actually asking, I know vegetables are not part of GST, it's out of that system. I asked my local vegetable vendor called Pawan that, what is your total turnover and how much you... So he said that I make as in my profit is about, I would say, 1,000 to 1,500 rupees, depends. So I make about 35,000 rupees a month. But my turnover is approximately 15 to 20,000 rupees, which is dhanda, as he says. Per day. Per day. So 20,000 into 30, you can imagine, takes you to what, 70 or lakh rupees a year? Yeah. That puts you into GST bracket. Now obviously vegetables are not in there, but there are many, many, many businesses which are like that. Let's say carpenters, right? Carpenter, you do that, no one's going to take you because they don't get input credit if they bought things from you. So a bigger business is not going to buy from a smaller vendor, simply because... That's the other part. Yeah. In fact, it forces you to buy from bigger parties and that's a second strike against the informal sector because they cannot provide services easily because that input credit then doesn't come to the... So what has happened is as I was reading in a paper that approximately 50% of people who are below the threshold have registered for GST because being outside the threshold, not registering for GST means they won't get business. Now what happens, you're a small person, you have paid GST, you pay GST, your income is lower than that. So what do you do? You go to a bank, claim working capital loans, pay GST with that, you're finished in three months. So after industry has got finished. So this part of the equation is not so easily understood, shall we say, but what's called the pink papers because they are not the people who are dealing with this. Again, I don't know whether it's not understood because they understand that this is a process by which it leads to formalization. They're happy with that. They're happy with that. Now we know formalization increases inequality. It's as simple as that. The truth is that in a country like ours, if the small entrepreneur has to pay full taxes, he cannot compete. He or she cannot compete. We know that. Here we are not talking about full taxation. We are simply talking about GST. GST, exactly. Which is held. Even if he wants to pay taxes in full, we are talking about working capital. Exactly. And because he circulates his capital very fast, he survives. If he can't circulate it fast, he's finished. That's also the smallest. But the smallest of the people, the smallest of the people, someone gave me an example that there was an office which would basically buy tea from the vendors outside the office and distribute it inside the office. Now there's a limit on the amount of cash that you can, transaction that you can do in a day. So they say that if we buy tea from this person in cash, our cash is getting locked up in this because we can't get input credit on the tea we're buying. So what they did is they put a machine. So that guy shut down. So these are things which occur. Small things which are shifting. But you know, Modi government's main creditors, they are formalizing the economy, which is why they've got, shall we say, support from the the pink press and the relatively well-off sections. Leaving that part out for the time being, we'll come back to this another day. The last point that they wanted to talk about is you talked about the R word recession. Now the argument has been that since economies like India are still growing, they are not stable economies. Therefore what we should look at is not recession but growth recession. And what we are seeing clearly is growth recession that we are coming to the lowest growth for in the last six years, even government statistics. We are seeing a loss of demand which is only increasing. And you are seeing already three and a half lakh, 350,000 people unemployed in the auto-wile sector. You already had a recession in the housing sector. And you also saw the public sector, which could be used to pump the prime pump, that their surplus has been taken away in terms of buying other public sectors. Which means what the government has done is to cover its deficit by using the resources of the public sector. Which means that they cannot also now create demand because they don't have the capital that money will be taken. Now this all of it means today that you don't really have an ability to prime the pump. And what you are seeing, if it also translates into shortfall of tax revenue, and this is what the GST revenue seems to show, that you have a fault, then the question is how do you make this up? This is the key crux, key question that we have. So I would argue that, and this is being argued by people from the left and the right, that in a situation like this where you might not have a recession because technically it will have to be two quarters of negative growth to be called. It might not happen in a low... It might not happen, but it is true that sectors of the country are facing recession. So it might not be an overall, but automobile industry has negative growth. We know certain places which has negative growth. And I think large number of people have negative growth of real income. So the point is that in a situation like this I think that all you have to do is print notes. I know I said this on... Is that taking away the reserve bank surplus? Yeah, exactly. That's exactly what they did. And the point is that this is not an argument made by heterodox economists or left economists. This is being made by Ben Bernanke. It was made by Larry Summers. Last people to be called leftists. The point is you have to forget about this ridiculous thing called the FRBM which tells you that you have to keep reducing your fiscal deficit to I think bring it down to 2% or something over a period of time. No government believes in that and therefore they push their actual expenditure on to other entities which are not in that balance sheet of the budget. Now the point is you have to forget about it. The only two years where we have had good growth and employment actually are the two years when the UP actually spent money it gave that stimulus without that there is no way at all that you can do anything about it. The problem that lies of course is the global financial markets don't like this. In India or at least the people in power at the moment including the people in the reserve bank actually feared the shall we say the unhappiness of rating agencies more than anyone else. So they're not so afraid of the people as of the rating agencies. So here's another thing that let's look at why governments are scared of rating agencies because what happens is that the risk premium attached to an equity market that goes up. So essentially money flows out automatically now since a lot of the money that is being put into India are through passive funds where there's no active thing out there which is putting in money. So when the risk premium goes up the money will flow out. So therefore that's their fear. The truth of the matter is that in 2009-10 when money was put into the markets I think the sense it's a drop to below 10,000 or something like that it was somewhere around 9,000 it went up to whatever 21-23,000 points right. So it's people come looking for earnings so if you have earnings they're going to come whether you do it through as you said fiscal deficit, printing notes it doesn't matter. The idea that they won't like it is true they don't like it because it appears then that why do you need the private sector? If the state can do all this that's their fear. This is the issue that capitalists don't like it but they love it when the earnings of companies go up and I'm saying that basically because the belief that getting capital will become more expensive therefore you have to keep the laws of capital essentially the financial markets happy. Which again is an absolute myth because whatever the... We are on the same side of that I'm saying the orthodoxy as in the heterodoxy that is a conservative view But the orthodoxy today is saying I think that it's only the orthodoxy in India which still holds on to this. If you look at what the American orthodoxy is saying what the European other than the bank heads everyone is saying spend. Well don't forget the Germans. The Germans are not in the scapegoat. Thank you Adiddo for being with us. We have to continue this conversation for much longer because as we know the clouds of recession are only going to be darker. It doesn't look like it's going to be lighted in the short run not with the policies we still see of managing headlines but not managing the economy. Thank you very much for being with us. This is all the time we have a news click today. Do keep watching news click and visit our website.