Most Economies in the World Increased GDP and Lowered Unemployment in 2017. Not India

The farm economy deteriorated and small enterprises were hit badly in the last year.

As we bid farewell to 2017, The Wire looks back at some of the markers of disruption that affected different spheres, from politics and economics to technology and films.

Prime Minister Narendra Modi and finance minister Arun Jaitley might view the political economy disruptions of 2017 as a sort of nightmare best avoided for all times to come. In many ways, 2017 will be remembered for the severe, self-inflicted damage to India’s economy, causing a sharp slowdown in GDP growth and further accentuating the already-declining trend in new employment, even while deepening the devastation of farm incomes post demonetisation. One may recall how farmers got a 30%-40% lower price across the board for their rabi season produce in early 2017, largely due to a cash crunch in mandis.

The political economy response to the sheer damage to farm incomes reflected in the way the BJP got its worst electoral setback since 2002 in Saurashtra, where the middle peasantry dominated by the Patidars voted with much anger. Modi, who led the campaign from the front, admitted to his parliamentary party members that “only I know how difficult it was to secure a victory in Gujarat this time”. However, the prime minister’s diagnosis of the BJP’s heavy losses in Saurashtra was somewhat self-deluding. He said the ordinary BJP workers like him had worked relentlessly for 30 years to push back caste politics in Gujarat. But caste is again rearing its head, Modi cautioned.

Also read: Statistical Illusion: Do the Latest Growth Figures Really Point to a Recovery?

What the prime minister is refusing to acknowledge, consciously or otherwise, is that the middle peasantry is uniformly rising in revolt across parts of central, northern and western India, where the BJP got 90% of the Lok Sabha seats in 2014. True, these farmers represent the intermediate castes which they are using to organise themselves and to air their economic grievances. This is happening among the Marathas in Maharashtra and Jats in western UP and Rajasthan too.

In the recently-held local elections in Rajasthan, the farmers and allied small rural economy players voted against the BJP in anger. BJP’s vote share in the 2014 Lok Sabha elections was about 56%, but in the local body and panchayat elections this came down by about 15%. Consequently, the Congress won many more seats than the BJP.

Similarly, in the recently-held elections to the nagar panchayat in UP, which is on the cusp of the rural and urban, the BJP got less than 13% vote share. In the Jat peasantry-dominated western UP, Adityanath’s chosen candidates were defeated roundly by independents and other opposition candidates. Remember, Jats were fully behind the BJP in both the 2014 Lok Sabha and early 2017 assembly elections. So will the prime minister now make a case that, like in Gujarat, caste is rearing its head uniformly across several BJP-ruled states? If so, the prime minister must worry and look for other reasons to explain this phenomenon.

The fact is that 2017 saw the farm economy deteriorate, largely due to the after effects of demonetisation. Tragically, the farm sector was on its way to a partial recovery after two successive drought years when demonetisation was announced in November 2016. Its full effect, in terms of decline in farm income, was actually felt in the first half of 2017. Overall, real farm income growth appears to be barely positive, as the increase in minimum support price (MSP) is not even keeping pace with inflation under BJP rule. It is another matter that the bulk of the farmers and farm produce are outside of the MSP, which makes it even worse.

This impacted the overall economy as GDP growth declined to a new low of 5.7% in April-June 2017. There is little hope of a robust recovery in rural demand as the agriculture sector continues to do poorly in the somewhat-improved GDP data (6.2%) for July-September. The chief statistician of India has said GDP growth improvement is subject to revisions in the future as data for the informal sector and lakhs of smaller unlisted companies will be captured at a later stage. There is a caveat officially expressed by the Central Statistical Organisation (CSO) that the 7% growth in the manufacturing sector (July-September) is based on readily available data from bigger companies listed on the stock exchanges and registered with SEBI. At the same time, it says about 20% of the weightage in the manufacturing growth data is given to lakhs of smaller unlisted companies whose actual numbers will come later. A Reserve Bank of India study of a sample of this universe has clearly shown a substantial negative growth – of over 50% – in their sales and output of small units in the first quarter of 2017. That was even before the Goods and Services Tax (GST) further hit small enterprises – which, it should be remembered, form an important part of India’s export supply chain. So it is reasonable to assume that when the final numbers come, the overall estimates of manufacturing growth will have to be revised downward.

A worker operates a lathe machine as he makes a steel cutter at a manufacturing unit in Noida, on the outskirts of New Delhi November 3, 2014. Credit: Reuters/Anindito Mukherjee/FilesA worker operates a lathe machine as he makes a steel cutter at a manufacturing unit in Noida, on the outskirts of New Delhi November 3, 2014. Credit: Reuters/Anindito Mukherjee/Files

A worker operates a lathe machine as he makes a steel cutter at a manufacturing unit in Noida, on the outskirts of New Delhi November 3, 2014. Credit: Reuters/Anindito Mukherjee/Files

Another big flaw in the current GDP methodology is caused by the GST-related disruption. The CSO has partly used the VAT collected by the states on petroleum as a proxy to estimate growth in the service sectors like small trade, restaurants and hotels. This is because the GST collection data for small trade, restaurants, hotels etc. is very sketchy at present. So CSO partially used petrol/diesel VAT collection to project growth in these enterprises. Former chief statistician of India Pronab Sen says this is totally flawed, as petroleum retail taxes are levied on oil companies – which are essentially manufacturing companies – and their VAT cannot be used as proxy to determine the output of small trade services which continued to reel from the effects of demonetisation this fiscal. Therefore, one really doesn’t know what the real GDP numbers will turn out to be in 2017-18.

Also read: India’s Income Inequality Woes Are Compounded by Its Black Economy

The economic shock and the mess of GST implementation also led to India’s exports underperforming its emerging market peers in Asia and Latin America. China, Bangladesh, Vietnam, Taiwan and South Korea have taken advantage of the recovery in global trade and output in 2017, but India has been left out of this. In an article published recently in the Times of India, Ruchir Sharma, head of emerging market investments for Morgan Stanley, argued that three-fourths of world economies this year have experienced higher GDP growth, exports and lower unemployment. India, however, is among the one-fourth minority not to have experienced this upside. Sharma says unemployment is at a multi-decade low in many developed economies and even developing ones like China, Brazil and Russia are improving on this front. He says sub-par export performance by India cannot be attributed to a strengthening rupee, as other emerging market currencies have also strengthened against the dollar. In the end, the only possible reason for India staying out of the current robust global recovery in output and employment is the twin shock of demonetisation and messy GST implementation. One recalls how both Modi and Jaitley announced in 2014 end that except India, all other BRICS nations were in decline; and they blamed the UPA for everything. The boot seems to be on the other leg this time.