The Economy Isn’t Turning Out the Way We Were Told

Contrary to the NDA’s political claims, the overall emerging picture does not indicate a revival of the economy as had been stated in early 2015. Consequently, the government’s economic managers will remain in fire-fighting mode in 2016.

Finance Minister Arun Jaitley coming out of cabinet on December 30.

Finance Minister Arun Jaitley coming out of a meeting of the Union cabinet on December 30. Credit: PTI

A few months after the BJP-led National Democratic Alliance came to power in mid-2014, Finance Minister Arun Jaitley publicly declared that the economy had bottomed out and was poised to achieve higher levels of growth in the subsequent financial year. This optimism was also reflected in the Economic Survey and the budget presentation of 2015-2016, which estimated GDP growth at 8 to 8.5% for the current fiscal. However, nine months on, there seems to be considerable gloom as the mid-year economic survey of the finance ministry released recently admits to a deceleration in GDP growth compared to 2014-2015. Clearly, the economy hasn’t bottomed out as the finance minister had claimed. So what’s going on?

Worse, businesses seem to believe that GDP is slowing at a faster pace than what the official figures are capturing. RBI governor Raghuram Rajan explained this in an interview to Doordarshan after he cut interest rates by 50 basis points some time ago. He suggested that the real experience of businesses on the ground is not that of a GDP growth of 7% plus. When the head of a central bank says something like this, one must take serious note of it.

The mid-year review also addresses the general skepticism regarding the GDP numbers and in fact tries to allay apprehensions of deliberate data fudging. The review, guided by Chief Economic Advisor Arvind Subramanian, says, “the processes and institutions involved in their [data] construction are fiercely independent, with the Advisory Committee on National Accounts Statistics (ACNAS) being the principal decision maker on all matters … and the National Statistical Commission (NSC) being the final arbiter. The composition of the ACNAS and the NSC has remained substantially unaltered under different governments. The suggestion or insinuation of motivated GDP estimates is therefore preposterous.”

One tends to agree with Subramanian that there is no deliberate attempt to fudge GDP data. There could be genuine problems of collecting and collating data for India’s vast services sector, for instance, which accounts for nearly 60% of GDP.

However, even if specific data sets are somewhat inaccurate, they still give a reasonably good idea of the trend or direction of economic activity. The mid-year review gives a very disturbing account of the nominal GDP growth trend (real growth plus inflation). It says the nominal GDP growth was 13.5% in 2014-2015 and has slowed sharply to just 7.4% in the first half of 2015-2016. This is almost like suggesting that the income growth rate across the board is nearly halved!

Evidence on slowdown

According to the survey, the dramatic slowdown in nominal GDP growth shows up in the extremely low growth in corporate earnings. This obviously affects the future investment decisions of companies. Businesses look at nominal GDP growth as a key indicator for making new investments. When businesses don’t do well, the employees also suffer in terms of retrenchment and low salary growth. The organised private sector has experienced the worst retrenchment, the scale of which has not been seen in the past two decades. All this impacts demand adversely.

But the unorganised sector is affected even more, thus depressing rural demand in a big way. Farmers are reeling from the worst income/output crisis in decades with back-to-back droughts and unseasonal rains, and minimum support prices barely covering the cost of production of many agriculture items. Agriculture incomes this year may well be witnessing negative growth and the vast array of services associated with agriculture may also be impacted badly. Agricultural output is linked to global prices and has suffered a serious deflationary impact along with various commodities in the manufacturing sector. One example would suffice to explain this phenomenon. In rural Gujarat, farmers got over Rs. 7000 per quintal of cotton as minimum support price from the government until early 2012. This year, the farmers got Rs. 4000 per quintal, barely covering costs because global prices of cotton fell 40%.

This distress was visible among voters in the Gujarat panchayat elections, where the BJP lost over 75% of the zilla panchayats for the first time in 12 years. This story is repeated across many other agricultural items where the minimum support price has barely covered costs, according to well known farm sector economist Ashok Gulati.

There is another very disturbing trend in 2015-2016 – the GDP deflator for the economy, which measures price changes across agriculture, industry and services, and which economists widely regard as the most accurate indicator of prices, is negative for the first two quarters. The national accounts for the latest quarter, July –September 2015, show a deflator of minus 2.2%. This means nominal GDP is lower than real GDP for the same quarter. If real GDP growth is 7.2%, the nominal GDP growth will be about 2 percentage points less. This will be a further dampener for businesses that face shrinkage in earnings.

So the overall picture that emerges from the data presented in the mid-year review does not indicate a revival of the economy as had been anticipated in the beginning of the year.Union Railway Minister Suresh Prabhu was quite forthright in telling this writer that his own projections for the growth in freight traffic receipts, a direct play on the economy, is much lower than expected. “We had projected close to 10% growth in freight revenue but growth is flat so far,” he admitted, adding, “We need to rework our assumptions.”

Prabhu also conceded that the global demand recession, commodities deflation and the Chinese slowdown need to be analysed more closely. It is clear we have not fully understood what is going on, he said.

What Prabhu says is echoed by renowned Harvard economist Kenneth Rogoff, who has questioned the narrative that the dramatic halving of oil prices since last year would hugely boost consumption by putting over $1.5 trillion in the hands of the consumer. Rogoff says the anticipated uptick in global demand and GDP, which many expected would come from the oil price fall, hasn’t happened so far. Consequently, the overall global GDP growth for 2015, at 2.5%, is much lower than anticipated. Since most emerging market currencies this year have declined against the dollar, global GDP growth in dollar terms would be negative, according to Ruchir Sharma, chief of Morgan Stanley Investment Management.

The finance minister last week publicly claimed “great satisfaction” that India is doing better than most emerging economies. That should be cold comfort as most emerging economies are in serious recession. This is hardly a time to express “great satisfaction” because there is visible distress in rural India where 60% of India’s population lives.

Mounting rural distress

What do you say about an economy in which total power consumption, in peak summer, is only about 55% of available capacity? Some say the poor are willing to live without power because they are unable to pay for it. India’s political economy confounds global experts. Normally, one would expect that people would even pay a higher price for something as basic as electricity. But in India this is not so; the very poor seem to have taken darkness for 14 hours a day in their stride because they are unwilling to pay Rs. 5 to Rs. 6 per unit of power. And states like Uttar Pradesh don’t buy power to supply at lower rates for fear of having more red ink in their already bankrupt State Electricity Boards.

The complexities of India’s economy seem beyond most experts sitting in North Block. What really takes the cake is an observation in the mid-year review lauding “muted rural wage growth” for helping dampen consumer prices (almost celebrating stagnating farm incomes). This is strange because the wage growth in the farm sector is so muted that it is causing election debacles for the ruling NDA. The next episode of this could be witnessed in Punjab, where farmers are already up in arms.

Against this backdrop, there are reports that Prime Minister Modi and Finance Minister Jaitley will focus the 2016-2017 budget on shoring up agriculture and coming up with some innovative social security net for the unorganised sector. There seems to be panic in the BJP camp after some shock defeats in the state assembly and panchayat elections in recent months. It appears that the NDA’s economic management will remain in fire-fighting mode in 2016 too.

  • ashok759

    Difficult to judge whether a seek to please all, vote chasing Budget in Feb 2016 is the best elixir for the economy. After that, serious reform will be impossible.


    (1) When NDA
    government came to power in May 2014, there were too many expectations. When one
    reviews achievements of this government it is possible to do a conventional
    assessment of performance of NDA government on economic front under prime
    ministership of Mr. Narendra Modi. But it may not be a fair assessment after
    just nineteen months. (2) Critics like Mr. P Chidambaram may not give good
    marks to NDA government. Even if performance of NDA government is not very good
    it is definitely worth appreciating. (3) Citizens like me, who are not attached
    to a particular political party, may not be over impressed by so-called
    achievements of the NDA government but they are ready to wait and give few more
    years to the government. (4) Of course, there are some questions to be asked
    too: (a) Has anyone in BJP made any effort to change political culture of
    money? (b) Has use of unaccounted money during election been controlled? (c)
    Why have efforts to control generation of black or unaccounted money failed?
    (c) Has BJP not learnt any lesson from its error of justifying disruptions of
    proceedings of Parliament as a legitimate strategy?

  • acrutiapps

    Narendra Modi has appointed a dud for finance minister. The guy could not win an election, has absolutely no achievements to show, no one has any clue what he stands for and he is brilliant at making arguments from either sides. This is precisely what I had expected.

    Even Jayant Sinha could have done a better job as cabinet finance minister than Jaitley.