India Growth Story An Unorthodox Narrative
In the last decade or so Indian growth story in economic literature has appeared more like a review of an abstract piece of modern art where same lines, same figures, contours and shades have been interpreted uniquely by each observer. And understandably, these ‘Davos Centric’ or ‘activism-oriented’ interpretation have no ‘connect’ with the story of the common man who suffered the ‘irrational economics of Bharat Nirman’ of UPA, in terms of paralysing price rise, shrinking consumption baskets, lack of social infrastructure, shameful corruption and gross governance deficit.
Decade low 5 per cent
However, the worst news came last week when the CSO released an unexpectedly low growth rate of 5 per cent (See Table – 1).
There are instant discussions on implications and the urgent steps that the government will be forced to take urgently. Boosting investment, cutting expenditure and a growth-oriented budget are the spontaneous suggestions. However, fresh arguments between the CSO and the finance ministry are worth observing at this point where the latter challenged the CSO estimates of 5 per cent growth in the current fiscal by saying “at turning points in GDP growth looking at past data underestimates the change …….. When you are trending down you tend to underestimate and when you are trending up you tend to overestimate. In support of their tentative arguments the Finmin ‘babus’ also presented a table where revised and actual estimates were mostly different.
Thus, the CSO missed the upturn and underestimated output growth and, therefore, the actual growth rate should be 5.5 per cent, the finance ministry claimed. Later last week, Chindambaram himself came out with a ‘Gangnam Style’ elusive statement.” “We believe that the upturn has begun (!) It’s a very low curve, not a V shaped curve, it’s perhaps a very long and shallow U”. Sure a face saving statement and politically correct one too by the FM before the budget.
Interestingly, the statisticians at CSO vehemently rejects his views saying there are no visible green shoots, which they have missed, contrary to this, they see further slowdown and no turnaround as purported by the finance ministry.
“There is no growth visible in most sectors, be it construction or other services, so how do you expect us to assume a higher growth rate when numbers till December indicate a further decline?” The CSO questioned. Interestingly, amidst all the heated arguments, a particular bunch of economists are also blaming that a methodological error must have contributed to generate such low figures.
Downturn is real
To leave the current debate here, if one moves to the IMF growth estimates which were released just before the current episode, the estimates have also been altered between 6-7 per cent range from 7.5 to 8 per cent in recent years which is discouraging , even if the IMF sympathetically gives an indication of ‘subdued recovery’ conclusion in its latest report. Despite the pointed differences in percentage points, the growth rate is falling consistently and it is not expected to remain in the respectful range of 7-9 per cent as was eternally assumed by UPA-I. Growth slowdown scan can be done by the tables given in Fig. 1, which indicate that the initial investment slump is now an established slowdown. Recent investment declaration cannot be fully explained by the standard macro variables and there are clear supply bottlenecks hampering growth. And the ‘stagflation’ and falling indicator syndrome is real as the fiscal deficits have increased from 3.97 per cent to 8.10per cent, inflationary trends are consistent, the rupee depreciation is a reality and household savings GDP ratio is disturbingly low the consumer spending and private investment are falling (See Table-3).
The indications of the downturn were grossly ignored in last two years as the brilliant ministers were either busy attacking institutions like CAG by designing ingenious ‘zero loss theories’ to camouflage corruption or in crushing people’s anger against mis-governance through the state violence. Who had the time to think about things like inflation or unemployment? They were perceived as ugly waste of growth policies and just were to be dumped under the welfare programmes. Sure , a few desperate attempts were made to redefine poverty lines attracting contempt from all directions, but on ground the ‘strategic silence’ and ‘policy paralysis’ were the only counter activities that were offered as an answer to the growing economic crisis. Doubts are being raised now that India has not created significant wealth in last few years. All it has done is some redistribution of wealth with undesired structural distortions.
Coming back to the CSO projections, the most alarming fact is that the service sector which accounts for nearly 60 per cent of GDP, is likely to grow at 6.6 per cent compared to growth of 6.2 per cent in the previous year. This is the slowest pace of growth for the services sector. Farm sector is likely to grow a shameful 1.8 per cent in 2012-13 compared to 3.6 per cent previous year while the manufacturing sector has fallen to 1.9 per cent from the previous 2.7 per cent. And all this should happen despite the much publicised New Manufacturing Policy of 2011 which was projected as steroid drug to boost the ailing manufacturing sector and the repeated assurances of the Prime Minister to initiate revised second green revolution to restructure the agricultural sector. More medicines more ailments!
Around this time last year, a bunch of economist like us, who were then fondly termed as chorus of gloom, had predicted that these trends and symptoms are necessarily structural are indicative of a serious downturn which is real and here to stay. While Prof Kaushik Basu, India’s Chief Economic Advisor, then, was busy giving a healing touch before the budget 2012-13 by claiming that the growth will end the year around 7.5 per cent and that the slowdown was due to feeble growth in US and Europe a ratcheting up of interest rates to quash inflation and some decision making delays in government, some were fiercely arguing that reasons of such consistent slowdown are deeper than just ‘global’ and ‘policy-risk-aversion’.
The structural faults in the UPA economic policies were visible from the 12th plan approach paper itself, where the government approach apparently was to adopt policies to achieve faster, sustainable and more inclusive growth. But on ground, the prescriptions were essentially ‘exclusionary’ both in terms of prescription and perception.
Now, once the dust has settled, analytics of slowdown indicate that it can be broadly attributed to a combination of structural, external and other factors. However, there is raging debate on the proportions of this combination. Where the IMF in its latest report finds “the recent measures taken by authorities boosting confidence….. the near term outlook is for a subdued recovery with elevated inflation as investment has been significantly hit and supply bottlenecks will only easing slowly”, the government explanations alternatively take a risky direction of indirectly blaming RBI reluctance to cut interest rate, poor performance of the global economy and inadequacy to push ‘reforms’ in absence of political consensus. Let us examine the strength of the official arguments.
First about the global impact. We feel India should be less affected when compared with other Asian economies, given its significantly lower integration with developed countries through trade. Secondly, the degree and pace of reforms and their ‘inadequacy’ argument also does not seem valid enough. Because each nation will find its own equilibrium of incentivisation of investment based on endogenous variables which include political variables, so UPA-II argument that the ‘no-consensus politics’ has hampered the reform process is baseless.
In support of our argument, it’s worthwhile recalling the case of acceptance of FDI in retail episode here. Though the government was pushing it since 2010 and the drama of building consensus was staged first through the consultation papers of the ministries and later through stakeholders review meetings, it was clear that ‘Indian Polity’ was not ready to accept such a preposterous policy which made neither economic nor political sense. The opposition of FDI in retail was stiff and obvious and it will be a matter of future explanation for the Congress that why such a ruthless decision involving human costs was taken, but the point here is, despite all the anger and protest, the decision was forced. So, the argument of the non-cooperation and absence of political consensus restrained the government to take rational growth-oriented decision is sheer nonsense.
GOVT SCEPTICAL OF CSO’S FIGURE
The Indian economy is slated to grow by 5 per cent. That is what has been estimated by the Central Statistics Office recently.
It may be noted that the finance ministry’s mid-year review had put 2012-13 Gross Domestic Product (GDP) growth at 5.7-5.9 per cent, while the Reserve Bank of India (RBI) had pegged it at 5.5 per cent. The International Monetary Fund has just tweaked the figure to 5.4 per cent.
The CSO’s forecast that the GDP will grow at 4.6 per cent in the second half of the fiscal year after having registered a growth of 5.4 per cent in the first half, has sent alarm bells ringing for Indian economy.
It is an open secret that the slowdown in farm, manufacturing and services sectors has led to this chaotic situation. The provisional estimates showed that the farm sector is likely to grow 1.8 per cent in 2012-13 against 3.6 per cent per cent in 2011-12 and the manufacturing sector is seen expanding at 1.9 per cent as against 2.7 per cent last year. The services sector, which accounts for nearly 60 per cent of GDP, is likely to register 6.6 per cent growth in 2012-13 as against 8.2 per cent in 2011-12.
But the finance ministry is optimistic and feels that the economy will tide over the situation and end the year on a better note.
“As per practice, this projection is based on extrapolation of numbers till November 2012. Since then, leading indicators have turned up, suggesting some hope that we will end the year on a better note,” the government felt.
Amidst this gloomy forecast, the expectations of a growth-sustained budget has increased in the present scenario and Finance Minister P Chidambaram will have to work hard by bridging the yawning gap of fiscal and trade deficits. However, he has to eschew the populist measures in his budget presentation, but then it will be hard as the Congress will try to woo the electorate with largesee through the forthcoming budget, which will also be the last one of this government before the impending 2014 general elections.
However, Chidambaram is optimistic and he expects a growth rate of about 6-7 per cent in the next financial year. For the current financial year, he hopes economy to grow at 5.5 per cent against the 5 per cent projected by the CSO. “We believe that growth in the current fiscal year will be 5.5 per cent, higher than CSO’s estimate of 5 per cent,” he said.
Meanwhile, Planning Commission deputy chairman Montek Singh Ahluwalia is sceptical about the CSO’s estimate. “I am not certain whether they (CSO) have done it (growth estimate) in a correct way. I think it (5 per cent growth) is very low,” claimed Ahluwalia.
It may be noted that the Indian economy had emerged among the fastest growing economies in the world with a robust growth rate of over 9 per cent for three consecutive years till the global meltdown in 2008- 09. However, it has rapidly slipped since then.
Meanwhile, the capital investment is estimated to slow down to an annual 2.48 per cent in 2012-13 as against 4.4 per cent in 2011-12, warns the CSO. This situation could largely be attributed to major projects, like road, power and mining failing to take off due to several reasons including environmental clearance and land acquisition.
The slump in economy has taken its toll on the lifestyle of average Indians. There has been a little increase in per capita income of 2.9 per cent during 2012-13. It may be noted tha the per capita income was Rs 39,143 in 2012-13 as against Rs 38,037 in 2011-12. (Uday India Bureau)
The fact is UPA-II could never design a holistic and exact prescription for the economic ailments for two reasons. Once, they knew that ailments were due to their own way of functioning and two, the duality of power centres paralysed functioning.
A major overhaul was required but was not possible. And there was a mounting pressure. Thus, so called reform package introduced last year and recently can be taken only ‘distress acts’ to save the situation. The government’s plan to restructure debt and reduce the discoms losses, and initiatives like Cabinet Committee on Investment- are the steps in this category and are either too late or not sufficient. It is only natural that these could not generate the desired stimuli for growth as the structural reforms which involve agricultural sector, energy sector, manufacturing sector, labour reforms, education, administration, police and internal security- were real reforms that were needed.
However, some more discussions on the growth slowdown analysis, merit attention here. We have mentioned earlier that falling infrastructure and corporate investment led the slowdown though exports and private consumption is now also suffering. Global factors have hurt exports and weighed on investment, but India’s growth has slowed by more than the decline in trading partners’ growth would imply. Capital inflows remain resilient and international financial conditions favourable, suggesting so far the financial channels have not been prominent in the transmission of external shocks. The finance ministry would certainly like to overlook and may even contest this observation too.
Again, though, much emphasis on the supply side nature of slowdown is very debatable. Frankly, Government cannot admit its policy confusion and inertia were the main reasons.
It is true that recent scandals and corruption expose have stimulated ‘risk aversion’ and project approvals clearances and implementations have affected and supply bottlenecks and policy uncertainty have grossly hurt sectors like mining, manufacturing and infrastructure yet the story does not end here, with the current rate of investment, inflation and supply constraints India’s growth potential has been predicted below 6 per cent by analyst.
And in such conditions the impacts are far reaching and disturbing as they will severely impact employment potentials and poverty reduction indices. However, that is a separate section of debate.
The economy has entered a dark zone where the options are limited for maneuvering as WPI inflation is still 7.35 per cent and CPI at 9.8 per cent, household inflation still double digit (10-12). These conditions will keep the inflation up until the widening of production gap. Compromise in tax receipt because of declining economic activity will not be repaired by Chindambaram new formula of ‘Taxing the super rich” which is ‘vague’ and more political than economic. Despite Chindambaram international certification of financial consolidation commitment, 5.3 fiscal target seems unachievable and would thus leaves limited space for fiscal policy. And most worrisome fact is that current slowdown has significant structural component. So, if the investment is not revived and overall growth inducers not ignited fast the GDP growth rate over the next six to seven years will be affected. Is that the very shallow ‘U’ that you are indicating towards finance minister, which is cumulative result of inertia, misgovernance and faulty navigation steering of emerging India by UPA I & II?
In a nutshell, the signals of slowdown must have been purposefully overlooked by the finance minister due to the political compulsions but we don’t see any clear signs of upturn in near time. Contrary, we expect growth to fall, inflation to exacerbate, tax revenue to fall and stagnate and the growing CAD to worsen the situation. The related risks would be sharply evident job losses, increasing poverty in both rural and urban sectors, increasing gender in equality in wages and incomes, employment and huge anger and social unrest.
What went wrong where?
We have strong reasons to argue that the India Emerging was aborted because of the wrong architecture and conceptually wrong design of its planning and policy making process, which was more inspired by credit rating and IMF school of thought.
Bharat suffered anomalies of Manmohnomics. An optimal indigenous model of development based on local variables specificities and constraints was never a priority of UPA. In enthusiastic attempts to correct financial fundamental the Indian economy was fundamentally hurt. India announced inclusive growth by excluding Bharat.
All along in the planning process, budgets and policy initiatives we observe a systematic negligence rural and agricultural India. With a MHNREGA oriented development strategy for the rural India, which was prescribed in bulk as the life saving drug and thus was thought to be made available and administered for a sustained rural development, completely infected ‘bone-narrow’ of agrarian and rural economy of India.
The gross error-assumption that the 12th plan also makes it to sustain ‘inclusive development’ through agricultural acceleration without simultaneous structural reforms we were shocked to note the insensitive remarks of Montek Singh Ahlwalia in 12th plan approach paper which underlines his lack of understanding of rural economy, when he suggests that “small and marginal farmers should lease out their land to bigger farmers to move on to employment in non-agricultural sectors”.
The rural and agricultural sector requires great deal of attention, imagination and space in the grand design of the Planning Commission. Some good attempts though have been made in some BJP-run states. First, Karnataka came with a separate ‘agri-budget’ which was extremely innovative and later S Singh Chouhan, on the advice of Gadkari, concentrated on agricultural growth and the Madhya Pradesh showed a double digit agri-growth rate. Earlier in Rajasthan, record availability of power boosted agri-sector in Vasundhara Raje regime. We don’t have to reiterate that in the Indian context this sector is vital from the point of view of subsistence to food security. The relegation of this sector to grey zones assuming the FDI in retail will boost and turn the tide for farmers and help them to obtain reasonable prices by improving terms of trade in their favour is a criminal assumption. Agrarian economy needs both vision and support to fuel the second ‘green revolution’.
Again, the unskilled labour intensive product sectors presented vast potentials, which remain unexploited. It is beyond our understanding that why the manufacturing sector received attention after such a long time? Anyway, the NMP 20011, which was marketed as the major reform initiative then, is invisible and operating without any significant output.
Not to talk of the ‘skill mismatch’ aspect which as acted as a major growth constraint for the services. Efforts like Skill Development Council are cosmetic and don’t even perceive the scale of the problem.
Actual and immediate reforms are required in education, especially in higher education where a holistic initiative can only help the grim situation. To optimise the returns from the demographic advantage we require to re-invent this sector to fuel growth and development. What Sibbal has done to deform the sector in the name of reforms will have long term negative impact.
Global prescription with local panchkarma
The global prescriptions which are annoyingly mono-cultural should be coupled with local ‘panch-karma’ for better results and removal of anti-oxidants or the distortions.
Vigorous attempts to remove the supply constraints in energy, infrastructure and deregulation of prices of material resources in phased manner along with sustained fiscal consolidation, towards which Raghuram Rajan apparently looks serious, with oriented attempts to tax reforms, skill upgradation and investment boosting measures with maintaining constant policy rates in view of inflation. This is the standard intentional protocol based prescription. Follow it cautiously, but combine and refine it with some local specifics which we mentioned above. Now, some more detoxifying.
‘Less government, more governance’ has been empirically tried. Apply it at least on an experimental basis. Downsizing government is a serious proposition which should be done urgently.
A re-engineering of the social development policy should be the first priority. ‘Inclusiveness without simultaneous structural reforms is redundant. ‘Enabling development policy’ looks an attractive alternative as it offers a software design including manifold increase on skill development, education, social infrastructure and health. India has to evolve an alternative endogenous model and a blueprint of development based on its own layered and complex realities, specificities and constraints.
Interestingly, Narendra Modi’s recent lecture at SRCC, Delhi hints at some canonical elements of this model – Skill, Scale, Speed and Spirit. And above all hope.
By Jyoti Kiran
(The author is eminent economist and columnist)