 Hello and welcome to NewsClick. Today we have with us Professor Jayati Ghosh and we will discuss the year end economy where it is, what it is travelled through and what its future is. Jayati, how do you look at this one year? We have had two upheavals, demonetization which lasted pretty much into the first half of the year. Now, GST which is still sort of unsettling the industry and trade every everybody else. How do you look at the impact of the economy? Well, very clearly its negative. I think what is remarkable about India now this last year is that when the rest of the economy in the world seems to be recovering slightly and when even Europe and gone cases in a number of other countries have been recovering from the previous recession, India is on a bit of a deceleration and its largely internal. In fact its almost entirely internal. That is as you said the impact of the demonetization which still persists because the impact on the informal sector has this very prolonged ripple effects and a very, very badly mismanaged implementation of the GST. Now, it is also interesting that the GST hit has it precise the same sector demonetization tent. The informal sector, the small sector and even in some cases the medium sector, medium sector and small sector. It appears that the working capital has been sucked out of this company and is now in somewhere in limbo and as a consequence that the whole rolling of capital which is what this company is dependent upon is not happening. How do you think this is considered? Well, you know the GST itself there are reasons to actually oppose it in principle on the grounds that it is not federalist and it has all its regressive there are a number of concerns but quite beyond that the implementation has been so utterly ghastly that it actually beggars belief. Most countries that have implemented it have taken between one and a half to three years to actually get the process going and put everything in place. Here the government tried to do it in three months and we are experiencing the results of trying to do it in three months. So it was ham-handed to begin with it was enforced on a completely unprepared informal sector which accounts for as you know about 85 percent of the employment and it was done in a way in which the confusion was so great that nobody knew what the rates were, who is going to pay what, how much you have to pay for the taxes, how much you are going to get as rebate. They have managed as a result this extraordinary achievement of causing prices to rise and lowering their own revenues which I think is unprecedented. Tax revenues in the second quarter of this year have come down sharply, everyone says because of GST the indirect taxes are well below expectation because after the first initial hike when in fact there was very very sharp increases in prices across the board they panicked and they reduced rates for a very large number of items and as a result now the revenues have come down. So how have they managed this, this complete mismanagement with GST, sucking of the capital, what's really happened? Well let's look at the whole issue of GST to start with. It is in principle there are many problems with the scheme. It is something which is anti-federal, which actually denies states the rights to actually raise revenues but apart from that the way it's implemented has actually meant forcing a large number of informal enterprises to enter the formal sector in the most unforgiving way which is to say that they are forced to register, they are forced to bring in their returns, they are forced to calculate their daily transactions to a level of detail that they are simply not used to and they are forced to work out all these different rates for each item of taxation. Now this is not something you can expect a very small player, let's say a small shop, Kirana shop to do, to know all the different rates for all the many goods that he or she is selling, to work out how much rebate they are entitled to ask for all their different suppliers, to know how much exactly to charge their own customers then to monitor all of these on a monthly basis and then to have accountants feed this thing and to upload the tax forms. What to do if they may after maybe three months get some money back as an accounting access? Well very few have actually got their rebates yet, that's the other problem is that we are now six months into the enterprise and very, I think about half of the companies concerned haven't got rebates yet. So there is a real concern and in addition to the effect of working capital being locked up, there is a real rise in costs, just accountancy costs, in tax consultants costs so that even the tiniest shops are now forced to actually pay five to six thousand rupees a month. Which is an underestimate probably more because GST consultants have become the most prized of accountants today. No I am talking about the tiniest shops, you know whose turnover is really very low and whose profitability is also let's say maybe ten, fifteen thousand a month and they are paying five or six. In fact that is one of the things that we saw in demonetization also, the big for instance the lock manufacturers in Aligarh, fed much better than the small shops, the small producers who really handled a completely different scale of production. You know it's true up to a point but I think there is a fundamental problem in India which is that the links between the formal and informal sector are so strong and so complex that you can't really separate them and therefore when you destroy informal activity you also end up humming the formal sector. You disrupt supply chains, you disrupt effective demand, you really make it very difficult. Coming to the other set of issues, how has the country's financial sector stood up in terms of what is the kind of inflows you have had, the trade balances and so on? Has it also affected those? Well you know the strange thing is that in trade terms we are not doing particularly well. Our exports haven't gone up as much as they should have given global export recovery. We are still importing more, not just oil but a whole bunch of non-oil commodities as well. But on the other hand we are getting lots of capital inflows, portfolio capital and also a little bit of FDI and that's very surprising. We are getting lots of capital inflows so global investors are for some mistaken reason very bullish about the Indian economy. It is hot money. It is hot money and what that means is that this is money that can leave at the slightest hint of a problem. And in fact we have seen this already right, we saw this during the taper tantrum when there was a massive outflow of funds. The more hot money comes in, the more vulnerable your economy is to the slightest change in mood. And that change in mood can happen for a political reason, for some other reason happening in some other economy or simply because people get bullish about the United States again. So it's a very vulnerable situation when your balance of payments is relying excessively on large portfolio capital inflows coming in, which is what is happening at the moment. But the industry is not picking up. Domestic investment rates are falling, they continue to fall. And this is what makes even our GDP numbers, I mean lots of people have expressed skepticism, but our GDP numbers are even more surprising given that the same CSO recognizes that domestic investment is not picking up. So what a large part of the recent recovery that people talked about in GDP has to do with finance, insurance and real estate sector. The fire sector, which is a very problematic sector, and with the new GDP series that has shown very high volatility. Interestingly, it's a volatility that is exactly opposite to the volatility shown in agriculture. My colleague Vikas Ravel has written very well about this. He's really shown that if you compare the previous series with the new series, in the previous series finance, insurance and real estate does not show that volatility. In the new series it does. What it has the impact of doing is to smoothen out the effects of the agricultural volatility. And that matters because agriculture has not been performing well. So as agriculture continues to slide and doesn't show much GDP growth, fire is booming. And so when we're celebrating GDP growth, we're really celebrating what is called a bubble economy. What is the prognosis for the year 2018, this year, coming finally? It's obviously the case that it's hard to predict anything in an economy without knowing what the government is going to do. But one thing is very clear that this is an economy that is now suffering from an insufficiency of demand. It's had very heavy blows to informal activity and something has to happen to counteract it. Now the government does not seem willing to provide that kind of equivalent response. Stimulus to the... Stimulus. This is something like pay commission, which is a very upper middle class focused kind of stimulus and it's not enough to counteract the damage that you are inflicting on 85% of the workforce. So I would say as long as this strategy persists, we're going to see this kind of febrile uneven kind of growth, a few bubbles here and there, which inevitably have to burst and these bubbles usually end in tears. The tears could come in 2018, they could come in 2019. That again is a political call. If there are general elections in early 2019, then the attempt will be to postpone the tears through various other devices. Pivotative, increase the deficit and so on. Thank you very much Jayati for being with us. We hope to continue in 2018 what happens to the Indian economy and the global economy. This is all the time we have for NewsClick today. Do keep watching NewsClick, visit our YouTube channel and look at our webpage.