Misplaced euphoria

The post liberalisation politics have a tendency to respond to economic trends more decisively than ever before. The economic gloom especially the unprecedented rural distress during the first NDA regime led by Vajpayee led to the fall of the government despite orchestrated India shining campaign. The UPA in its first innings managed to ensure better economic growth which paid rich dividends to the Congress led regime in the form of reassuring electoral success in 2009.

But, the economic downturn induced by what is often described as policy paralysis alienated the UPA combine from the masses resulting in remarkable success for Modi led NDA. Thus, are the frantic attempts by people in power to yet again paint a rosy picture of the economy. As the numbers are not so encouraging, the ruling dispensation is desperate to win a perception battle. The reports of World Bank and rating agencies are used as instruments in this perception war.

World Bank estimated that India’s GDP is expected to grow at 7.3 percent in 2018-19. The estimates given in Global Economic Prospects (GEP) report obviously kicked off a major political storm with the ruling party claiming that the critics of demonetisation and GST have proved wrong and economy is on the recovery path while the opposition calls it a bluff.

The World Bank further estimated that the GDP will further grow at 7.5 per cent for the next two years. The country’s GDP grew at 6.3 per cent in the second quarter of the current fiscal. This is much higher than the three-year low of 5.7 per cent in the Q-1 of this financial year. Thus, the World Bank projections are defended on the experience of the Q-2 as compared to Q-1.

But, what has been the experience with these predictions in the past. Of the leading developing economies, India performed less strongly than what has been predicted by the World Bank in June 2017. Thus, the World Bank projections should be taken with a pinch of salt.

Disparaging indicators
However, the First Advance Estimates of National Income, 2017–18 released on 5, January by the Central Statistics Office (CSO) estimates that the economy is growing the slowest it has in the last four years. These estimates, use six to eight months of data on the Indian economy. Gross fixed capital formation (GFCF) as a proportion of gross domestic product (GDP), a key indicator of an economy’s ability to grow, is the lowest since the new National Accounts Statistics (NAS) series began in 2011.

The GFCF as a proportion of GDP has clearly declined to 29%, down from 34.3% in 2011. The CSO data estimates that real GDP will grow at 6.5% during 2017–18, year-on-year, lower than the 7.1% further estimated for the previous financial year. Gross value added (GVA) at constant prices is expected to grow at 6.1% compared to the previous year’s provisional estimates that record growth of 6.6%.

The other component of GDP, net taxes on products, is expected to grow slower than last year at 10.9% as the indirect tax revenue collections are slower on account of GST. Investment, as measured by GFCF has been in decline.
On the exports front too, India’s performance has been quite modest, while global trade has picked up over the last half-year.

Agrarian distress
Agriculture accounts for nearly half of India’s livelihood opportunities. Despite euphoria over the GDP numbers, the agrarian distress continues to haunt the nation thus dampening the rural sector. Despite a normal monsoon, the growth in agriculture and allied sectors declined to 1.7 percent in the second quarter of September-November 2017 from 2.3 percent in the earlier quarter. A year earlier it was 4.1 per cent indicating the extent of deceleration in a sector that determines the rural incomes and the household consumption expenditure of more than half of India’s population.

Fears over food inflation
Similarly, Food grain production contracted by 2.8 per cent when compared with 10.7 per cent expansion in the year earlier. Such a contraction in food grain production would result in higher food grain inflation. Coupled with the lowering rural incomes due to slow down in agriculture, higher food grain prices indicate an impending crisis in India’s villages. Higher food prices disproportionately hit the poor who spend most of their Monthly Per Capita expenditure on food consumption.

Subdued Consumption
India’s domestic demand is the critical component of the nation’s growth story. There cannot be any growth without rise in domestic consumption as India is not primarily an export driven economy.

But, private and public final consumption expenditure growth, are expected to fall year-on-year in 2017–18.
The household consumption expenditure stagnated around 6.5 per cent in the first two quarters of this fiscal. It was 7.9 per cent a year earlier. Such a drastic fall in domestic demand does not augur well for growth buoyancy.

Macroeconomic concerns
The macroeconomic indicators are also not so strong thus incapacitating government to initiate fiscal and monetary measures to stimulate growth. This government was in fact blessed by lower global oil prices ever since it took office. But, the government no longer enjoys the luxury of sluggish global oil prices. The fiscal deficit at the end of October has already reached 96 per cent of the budget estimates for the financial year 2017-18. Thus, the fiscal deficit would be much higher than anticipated by the end of this fiscal indicating the precarious nature of public finances.

Manufacturing trends
The higher growth rate in the second quarter of this fiscal as compared to the previous quarter was mainly fuelled by the impetus in the manufacturing sector. But, the Central Statistical Office (CSO) data reveals that the Index of Industrial Production (IIP) was at 2.2 per cent. This cannot be touted as real revival of the economy. Yet, the Gross Value Addition (GVA) in the manufacturing sector revealed a significant turnaround as the comparison for the second quarter is with the much lower base in the quarter that preceded. Thus, the enduring economic growth story cannot be built around such statistical illusions.

More than 70 per cent of the manufacturing growth rate is calculated based on the growth data provided by the listed corporate entities. But, India’s real story is in the informal and unorganised sector. These are the sectors which along with agriculture were most hit by the adverse impact of demonetisation and the GST.

Joblessness
The story of jobs is much more painful. The latest report of the Centre for Monitoring Indian Economy (CMIE) reveals that people have low hopes on finding jobs. India’s Labour Participation Rate (LPR) is low by international standards. The India’s Labour Participation Rate (LPR) has fallen from 47 per cent in January 2016 to less than 44 per cent in December 2017, says the CMIE’s latest report updated on its web site.

The global average LPR is 63 per cent, China has a LPR of 71 per cent. The low and falling LPR in India is established by three independent surveys including that of National Sample Survey Organisation (NSSO). The NSSO is an official statistical agency.

Thus, the euphoria over the GDP numbers is a misplaced triumphalism as they do not in any way reveal a sustainable revival in Indian economy. Thus, the world Bank estimates are more to do with cheering Indian policy planners to undertake more liberal reforms rather than testifying the country's economic recovery.

The way out
Instead of getting enthused by the favourable reports of International Financial Institutions or the so called rating agencies, the government should focus on measures that provide real stimulus to the economic growth. The untested experiments like demonetisation and the hasty tax reforms like GST have done more harm than good to the economy.

The focus areas should, therefore, be higher public investment in agriculture, rural infrastructure, human development especially in education and health, employment intensive manufacturing, mass services, etc. The rural non-farm sector should be able to provide more jobs so that heavy reliance on agriculture for livelihood would reduce. Quality infrastructure including in areas like supply chains, logistics would ensure better price for the producer. The domestic market, domestic savings and domestic investment have always been the key drivers of India's growth story. The policy measures that mop up India’s buoyant household savings into productive sectors of the economy should be critical component of any policy mix.