On May 31, 2017, the Ministry of Statistics and Programme Implementation declared the gross domestic product (GDP) numbers for the period January to March 2017 and also for the financial year 2016-2017. 

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The GDP growth for 2016-2017 stood at 7.1 per cent. For the period January to March 2017, the GDP growth came in at 6.1 per cent. This was well below the 7.1-per cent figure, which economists and analysts were expecting. It is now safe to say that the negative impact of demonetization, which had been visible in other economic indicators, is now visible even in the official GDP numbers.

If we were to leave out agriculture and government, then the private part of the economy grew by a mere 3.8 per cent between January and March 2017. It had grown by 10.7 per cent between January and March 2016. 

More specially, manufacturing grew by 5.3 per cent between January and March 2017, after having grown by 12.7 per cent during the previous year. Construction, which is a huge source of jobs, shrunk by 3.7 per cent in January to March 2017, after having grown by 6 per cent in the previous year. This should be a huge reason for worry given that a million Indians enter the workforce every month i.e. 1.2 crore for a year. 

Where are the jobs for these youth? Coming back to the main point, the data points highlighted above clearly show that demonetization did have a substantial negative impact on the private part of the economy. 

Of course, the government won’t admit to this. As the Finance Minister Arun Jaitley recently put it: “Through demonetization, the government created a new normal, with a big step in removing the earlier scenario of cash economy and shadow economy.” The trouble with the minister’s statement is that the data for digital transactions, which the RBI regularly compiles, doesn’t show anything like that. 

Having said that, there is a more worrying trend for the Indian economy, which has been playing out over the last few years.  

The investment-to-GDP ratio or investment as a part of the overall economy has come down dramatically since 2011-2012. In 2011-2012, it was at 34.31 per cent. From there it has fallen to 29.55 per cent in 2016-2017. (The only reason I have taken data starting from 2011-2012 is that the new GDP series, which was first published in January 2015, has GDP data starting from 2011-2012 only.) 

This dramatic fall in the investment-to-GDP ratio is the basic problem with the Indian economy. There are multiple reasons for this. The indiscriminate lending carried out by banks in general and public sector banks in particular, in the decade between 2002 and 2011, has led to a huge pile-up of bad loans. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. 

Given this, banks are no longer in the mood to lend to corporates all over again. Once bitten, twice shy, as they say. The outstanding bank loans to industry shrunk by 1.9 per cent during 2016-2017. 

Also, what has not helped is the fact that the rate of recovery of bad loans is very low and is falling. In case of the top five public sector banks, the rate of recovery of bad loans in 2016-2017 stood at 10.4 per cent, having fallen from 13.2 per cent in 2015-2016. 

Other than banks not wanting to lend, corporates are also not in the mood to borrow. This is primarily because of the low capacity utilisation rates of their existing infrastructure. 

As per the Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS), the capacity utilisation declined successively for three-quarters during 2016-17 and stood at 72.7 per cent during the period October to December 2016. This means that with more than one-fourth of the capacity of the corporates remaining unutilised, there is no point in them borrowing and expanding. 

The question is who is to be blamed for this? Of course, the previous Manmohan Singh regime which encouraged banks to lend to crony capitalists is responsible for this mess. Nevertheless, in the last three years of governing India, the Narendra Modi government has also made very little effort towards sorting out the mess in public sector banks. 

Indeed, the fall in the investment-to-GDP ratio is also reflected in the fact that the Indian economy is barely creating any jobs. And setting that right will take some doing. 

The writer is the author of India’s Big Government —The Intrusive State and How It is Hurting Us