The Modi Government Needs to Think Hard on Why GDP Is Slowing

The negative growth in overall investment in April-June also knocks the bottom out of the government’s oft repeated claims that India is attracting unprecedented FDI flows because of new policy measures.

Narendra Modi will attend the EU-India Summit in Brussels on March 30. Credit: PTI

Narendra Modi and his ministers need to think long and hard on why GDP is slowing. Credit: PTI

The GDP growth figure of 7.1% for the April-June quarter must come as a big dampener for the optimists in the NDA government who had convinced themselves that the Indian economy was decisively moving to a higher trajectory. Only a few days ago the chairman of Niti Aayog, Arvind Panagariya, said India would grow at 8% this fiscal. Panagariya must be regretting making that public claim now.

The April-June data not only shows that India’s GDP is decelerating, it also reveals another worrisome trend – the growth in gross fixed capital formation, a measure of the investments in the economy, is falling further in the negative territory. The growth in overall investment was recorded at minus 3% in the April-June quarter. This, inspite of the government having upped its capital spending by over 18%. What this clearly tells us is that private investment is not reviving yet.

This trend also knocks the bottom out of the government’s oft repeated claims that India is attracting unprecedented FDI flows because of new policy measures. Indeed, if FDI flows are so robust, should it not reflect in the increase in private investments? The first thing any businessman will tell you is foreign investments always follow domestic investments. I haven’t seen any example in recent history – the last 30 years – of massive foreign-investment-led projects coming up even as domestic private investment growth is nearly non- existent. The two always go hand to hand and indeed complement each other.

The big puzzle in the current phase of economic activity is that private investment growth remains tepid, as shown by the latest government data, but policymakers claim there is an FDI-led investment surge. Is this really happening?

A closer look at the latest RBI data presented in its annual report suggests that FDI growth in Indian manufacturing has actually declined in 2015-16 as compared with 2014-15. FDI inflows in manufacturing were $9.6 billion in 2014-15 and this came down to $8.44 billion in 2015-16. The decelerating trend in FDI is possibly continuing if one goes by the gross investment growth numbers that have come for the latest quarter.

Of course, there has been impressive growth in FDI inflow in the service sector over the past two years. Again, a lot of these inflows were in existing e-commerce and other unlisted ventures – called ‘unicorns’ – like Uber, Ola and Flipkart. These are in the nature of share acquisition in existing projects rather than fresh investment in greenfield ventures. Market observers say these inflows are also decelerating in the current fiscal as private equity and venture capital money is somewhat drying up this year.

“Going forward, we believe that the tailwind created by the Seventh Pay Commission award and a normal monsoon will not be enough to offset the triple drag created by slowing private capex growth, reduced private equity/venture capital inflows and suffocation in the provision of bank credit”, says a research report by Ambit Capital, a well-known investment advisory. The few positives for growth, such as the Seventh Pay Commission and better rural consumption followed by good monsoons, could get weighed down by big negatives like sluggish private investment and reduced private equity/venture capital inflows in 2016-17.

A former governor of the RBI, who won global acclaim for his acute foresight shown before the 2008 global financial crises, told this writer, “I am not surprised that the GDP numbers are what they are. The improvement in GDP last fiscal was because of a positive shock caused by the sharp fall in oil and commodity prices. That benefit is over and this a return to normalcy”.

  • Sunil Sivaramakrishnan

    Good read. The last paragraph is particularly notable. Looking forward impatiently to the post Governorship phase when Dr. Rajan could resume writing his insightful columns which he used to do regularly before he became the CEA.