This week we once again heard the prime minister and finance minister speak, at a recent media house event in the capital, about how well the economy is doing. The truth is nothing can improve our economic fundamentals till public investment is sharply increased. Manipulating statistics may help manage global headlines for a while, but cannot strengthen our economic fundamentals.
We had the PM also talking highly of the ‘unconventional’ methods that are being adopted like shifting to LED bulbs, for instance. This, he says, is having a ‘profound impact’ on our economy. Such measures at best can make a difference at the margins, but cannot impact upon the economic fundamentals.
On the basis of a highly dubious data-series, India’s GDP growth rate has been inflated. Many commentators and economists continue to point out the deeply flawed statistical basis of such data projections. The RBI governor and the chief economic adviser have both independently gone on record to suggest that this data does not gel with the ground realities. The government maintains that the real rate of growth is currently 7.2% while the nominal growth rate is 5.2%. The nominal growth rate is calculated on the current price levels. The real growth rate is calculated by discounting the rate of inflation from the nominal growth rate. This year, the government has calculated inflation on the basis of the wholesale price index which, it claims, has been minus 2.2%. Therefore, the real growth rate is higher than the nominal growth rate.
The base doesn’t lie
But all calculations by corporate India regarding investment is based on the profitability that relates mainly to the nominal growth rate. Consequently, the latest statistics released by the Reserve Bank of India for July-September 2015 on the performance of 2,711 companies shows that the sales have declined by minus 4.6%, value of production by minus 5.6% and the expenditure on raw material and a sharply falling costs of power and fuel have shown a decline of minus 18.7% and minus 4.2% respectively. The corporates, hence, were maintaining a decent rise in net profits by squeezing their expenditures. This means that the down the line multiplier effect is sharply declining. The services sector, which contributes the maximum to our GDP, has shown a whopping 33.9% fall in net profit (RBI data for 450 companies in the services sector). Clearly, consumption has not picked up despite the RBI cutting the ‘repo rate’ by close to 125 basis points since the beginning of this year.
Leaving aside the government’s data manipulations, a fundamental economic indicator – Gross Domestic Capital Formation – has shown a sharp decline. This means investment in the economy is declining. Between November and October, the index of industrial production and the manufacturing growth rate have both seen a sharp decline. The gross non performing assets of banks grew to 4.8% (quarter ending September 2015) from 4.4% in the previous three months. Finance Minister Arun Jaitley has stated that the NPAs of the nationalised banks rose 25.1%. Clearly, the borrowing undertaken by the corporates has not translated into profitable investments. Further, banking credit to industry declined by nearly 5%, belying the claim of a sharp rise in manufacturing. Growth in manufacturing should reflect in the growth of bank credit but the reality is the other way around. All this means that employment generation in the industrial sector is on the decline.
The agrarian distress continues to deepen. The recent increases in Minimum Support Prices (MSP) are nowhere near the costs of production. The BJP during its election campaign in 2014 promised that it would peg the MSP to at least 150% of the costs of production. This has been betrayed.
Consequently, the increased debt burden is forcing our farmers to commit distress suicides. This is sharply aggravating the deterioration in living standards in rural India. The government may take satisfaction at media headlines that the number of ‘dollar billionaires’ in India is rising. Currently, hundred such individuals hold a combined asset value of over a third of our GDP. On the other hand, the Census data recently released shows that 90% of all families in India have an average monthly income of less than Rs. 10,000. Naturally, the level of domestic demand in the economy is sharply contracting.
Usually, the real growth rate is interpreted as an index for people’s livelihood. But when the GDP calculations are based on WPI and not the retail price index (RPI), such a conclusion cannot be drawn. The crucial determinant of people’s livelihood is the RPI. The relentless rise in the prices of all essential goods, especially food items continues. When the international price of oil have sharply fallen (to nearly one-third of its levels two years ago), the retail prices of diesel, petrol, kerosene and cooking gas in India have been raised sharply and no benefits have been passed on to the people. Newer levies like the cess for ‘Swachh Bharat’ (and the rumoured cess on skill development) will only add to the existing burden. These come on top of the already existing cess for road development and separately for education. Remember, the revenue from such cesses are not shared with the states. The Central government is clearly augmenting its revenues in order to show a reduction in the fiscal deficit prior to the 2016 budget.
Phenomenal relief continues to be provided to corporate India through tax concessions on the pretext that these are ‘incentives’ for greater investment. On the other hand, even the meagre subsidies for the poor are cut as they are considered as “burdens on the economy”. But such incentives have not produced any positive results reflected in the data on industrial production. Our exports have fallen drastically. FDI avenues have been recklessly enlarged, without checking whether they will bring in investments that will increase the productive capacities of the Indian economy, skills, technology and jobs. FDI is being permitted to maximise profits, exploiting India’s mineral, natural resources and cheap labour, with no corresponding benefits to the Indian economy and people.
Instead of such concessions to India Inc., a huge amount of revenue would be available for new and high doses of public investment if all legitimate taxes are collected. Such public investment is the only way, through which all developed economies in the world, from the United States to China, have built their infrastructure, both economic and social. If this were to be done, then India’s woeful infrastructure situation would be considerably improved. Such public investment would generate large scale new employment. This, in turn, would put purchasing power in the hands of the people thus, expanding our domestic demand – the surest impetus for manufacturing and industrial growth.
This is the new ‘New Deal’ that India badly needs. But the Modi government doesn’t seem to be interested in improving our economic fundamentals or in people’s livelihood. It’s only pre-occupation appears to be media headline management – occupying people’s attention by moving from one event to another while relentlessly pursuing the real RSS agenda of sharpening communal polarisation to transform our secular democratic republic into their version of a rabidly intolerant fascistic ‘Hindu Rashtra’.
Sitaram Yechury is leader of the Communist Party of India (Marxist) and a Member of the Rajya Sabha