In an interview that throws buckets of cold water on any optimism created by the Q2 economic results announced on Friday, one of India’s most highly regarded economists has raised serious questions about the claim manufacturing has grown by 0.6% in Q2. India’s former chief statistician Pronab Sen says when the full facts are known, we could find that manufacturing contracted and did not grow. He also says manufacturing in Q3 will see negative growth.
Sen, who is presently the country director of the International Growth Centre and also chairman of the government’s Standing Committee on Economic Statistics, said that he expects GDP in Quarter 3 to shrink by a greater amount than it contracted in Quarter 2. He says that it’s likely that Quarter 4 will also be negative. He says for the year as a whole, the contraction in GDP will be more than 10% or, as he put it, “in the low double digits”.
More worryingly, Sen said that India has entered a phase where for the next 4-5 years, the trajectory of GDP growth will be around 5%. He explicitly said that not only are growth levels of 8-10% completely beyond reach, but even 7% and 6% is unattainable. Five percent levels will be the norm for the next few years.
In a 45-minute interview to Karan Thapar for The Wire, Sen expressed considerable concern about the financial crisis the country faces, which has not been properly recognised by the government and certainly not responded to. He also expressed great concern about the likelihood that next year, India could face an investment crisis. As he put it, at the moment investments that were decided before the lockdown are going through the pipeline, although at an accelerated speed, but after that there are no fresh projects and, worse still, no steps taken by the government to encourage investors and their animal spirits. This will lead to an investment-based crisis which, he said, would be much worse than the present demand-based economic crisis India is passing through.
Speaking about GDP manufacturing growth of 0.6% in Q2 and the fact that the index of industrial production shows a different picture, Sen told The Wire this is because the GDP figure looks at finished products, whereas the IIP figure looks at both inputs and raw materials and finished products. He said the combination of GDP and IIP results shows that corporates are not taking in new raw materials and fresh inputs but relying on those they have already stocked up before the lockdown. This suggests they will face problems when the present stock of inputs and raw materials is exhausted.
Sen also told The Wire that 75% of the GDP manufacturing figure reflects corporate sector performance on the basis of balance sheets filed with SEBI. These balance sheets reflect inordinate profit levels because expenditure on salaries as well as inputs and raw materials is sharply down. In other words, profits have increased but actual production and sales are likely to have contracted.
Digging deeper into the Q2 manufacturing growth of 0.6%, Sen said it also reflects a sharp building-up of stocks ahead of the festive season, which will definitely not continue thereafter. To a small extent, it’s also a result of the fact that in Quarter 2 of last year manufacturing shrank by 0.6%, thus giving this year’s Q2 the benefit of a low base effect.
Finally, Sen pointed out that 45% of manufacturing happens in the MSME sector, and perhaps as much as half of this sector is not registered and, therefore, not adequately and accurately accounted for in the Q2 manufacturing figure. It’s likely that this unaccounted element of MSME will have done considerably worse than the corporate sector. When the full picture emerges, he says it’s possible that manufacturing in Q2 will be negative and not positive. He also expects manufacturing in Q3 to be negative.
Sen expressed particular concern about the financial sector, which in Q2 did much worse than Q1. He says it faces two problems. First, a sizeable number of loans – and not just Mudra loans – have stopped paying interest and are likely to become NPAs. Only the moratorium or the unwillingness of banks to recognise the problem have stopped these loans being officially declared NPAs. However, these loans are not providing interest and, therefore, banks are not earning from them.
The second problem the financial sector faces is that credit is steadily declining. In the present economic conditions, people are not willing to borrow. As a result, banks cannot compensate for the interest they are losing or not earning on existing loans by interest on new loans. As he put it, the net interest margin of banks is steadily shrinking.
Sen said that this double whammy has already hit the banks and when, next year, it has to be recognised, because the moratoriums have ended, many banks will be perilously close to bankruptcy. He says the government will be required to stump up lakhs of crores to bail out the banks. He says the sum will be so large it be difficult to meet at one go. The government, therefore, needs to start making the money available in tranches from now. However, that is not happening and, worse, the government shows no recognition of the problem, leave aside any willingness to act.
Sen repeatedly confirmed that the mood of optimism created by the Q2 results is not borne out when you dig deeper into them. This is true whether you analyse the claim of growth in the manufacturing sector, the decline in services and, in particular, what he called professional services (as opposed to those that make immediate contact with their customers), the finance sector and what is failing to happen on the investment front.
Sen said that the present V-shaped recovery that we believe India is experiencing will look like a W in Q3 and 4.
Finally, asked by The Wire what advice he would give the prime minister in the light of the economic picture he has painted, Sen said that he would ask for an immediate and sizeable fiscal stimulus. He said it doesn’t matter if this means that the combined deficits of Centre and states rises to as much as 15%. He pointed out that a fiscal stimulus of this order will be acceptable and understandable at this point. However, if it’s not forthcoming then the government will be forced to do something similar a year or more down the road, when it will be criticised and considered fiscally irresponsible.
He agreed this also means that he is questioning the government’s judgement both in terms of the need for a fiscal stimulus as well as the timing of one.
The above is a paraphrased precis of Dr Pronab Sen’s interview to Karan Thapar for The Wire. The full interview will be published around 6 pm.