PM Modi doesn't understand economy, or is he lying?
The prime minister’s latest outburst against the critics who are expressing concerns over the fragile state of the economy is an attempt to cover up his nervousness by sheer hubris. This happens when economic policy-making becomes hostage to punter-like instincts, relying solely on sentiments and perceptions rather than on fundamentals and hard economic data.
The Reserve Bank of India has already downgraded the growth forecast in the current financial year from 7.3 per cent to 6.7 per cent, because of the overall growth slowdown in the first quarter of 2017-18, alongside a decline in the advanced estimates of kharif foodgrains production, the adverse impact of the GST on the manufacturing sector, no revival of investment activity or bank credit, given the bad loans crisis faced by the banking system, and weakening consumer and business confidence.
On the same day when the country’s central bank came out with this grim assessment of the economy, the prime minister chose to present his "alt-facts", as if his pep talk can substitute for economic stimuli. This is nothing but "headline management".
Narendra Modi claimed that the GDP growth rate had fallen below the current level of 5.7 per cent (Q1: 2017-18) on eight occasions under the previous UPA rule. This comparison is deceitful, because the methodology of GDP estimation has itself changed since January 2015, rendering such comparisons between the NDA and the UPA rule fraught with inconsistencies.
As per the old estimates, GDP growth had indeed ranged between 4.3 per cent and 5.2 per cent for eight straight quarters between Q1: 2012-13 and Q4: 2013-14. However, as per the new estimates, GVA growth was much higher than 5.7 per cent in four out of those eight quarters – it was 7 per cent in Q2: 2011-12 and ranged between 6.3 per cent and 7.1 per cent during Q1 to Q3: 2013-14.
Quarterly growth rates: Old and new series
So, was the prime minister referring to the old series of GDP estimates, or the new series of GVA estimates when he made his assertion?
If he was referring to the old series, then the GDP growth rate in the current quarter itself would have been much lower than 5.7 per cent. If he was referring to GVA growth estimates of the new series, he is way off the mark.
Instead of making such inaccurate statistical comparisons using two sets of data series involving different estimation methodologies, PM Modi should simply focus on the GVA growth numbers of the new data series, which have been generated under his rule.
Two facts stand out: first, the GVA growth rate today (5.6 per cent in Q1: 2017-18) is way below the rate when Modi assumed office as PM (8.5 per cent in Q2: 2014-15). Second, the GVA growth rate has been on a secular decline over the last five quarters - it has come down from 7.5 per cent in Q1: 2016-17 to 5.6 per cent in Q1: 2017-18.
If this is not an economic slowdown, what is it?
The data on automobile sales and air passengers, which the prime minister chose to tom-tom, merely represent the consumption demand of the affluent sections of society. Sustainable economic growth, however, is driven by investment. India’s investment rate (gross fixed capital formation to GDP ratio), which had touched 40 per cent before the global recession of 2008-09, has tumbled down to below 30 per cent in 2016-17. China’s investment rate, however, has continued to remain over 45 per cent in the post-recession period. All the other emerging economies in Asia have an average investment rate of over 37 per cent.
What is the point in claiming to be the “fastest-growing major economy”, when the investment rate in India has fallen significantly compared to its peers?
Real investment growth in India has nosedived from 7.4 per cent in Q1: 2016-17 to (-)2.1 per cent in Q4: 2016-17, and stood at 1.6 per cent in Q1: 2017-18. Month-wise growth in industrial credit turned negative since October 2016 and remained in the negative territory till March 2017. Manufacturing IIP growth has fallen from 6.7 per cent in Q1: 2016-17 to 1.8 per cent in Q1: 2017-18. These data released by the CSO and the RBI point towards a collapse of private investment within the economy in the recent period.
This is further corroborated by the CMIE Capex data, which show a continuous increase in the value of stalled projects over the past five quarters, reaching Rs 13.22 trillion in end of September 2017 (Q2: 2017-18).
The “stalling rate” of private sector projects (proportion of stalled projects to total projects under implementation) has reached 22 per cent in September 2017, which is much higher than the 18 per cent rate witnessed in March 2014, during the end-period of UPA rule, characterised as one afflicted by "policy paralysis". Most of the stalled projects are in the power and manufacturing sectors.
Announcement of new projects has come down from Rs 1.79 trillion in September 2016 to a mere Rs 30,000 crore in September 2017. In fact, the government’s new project announcements worth Rs 53,000 crore surpassed that of the private sector in September 2017.
How can the head of an avowedly pro-business government ignore such glaring distress signals vis-a-vis private investment activity?
The prime minister, while boasting about the $400 billion foreign exchange reserves, forgot to mention that India’s external debt today also amounts to over $485 billion. The RBI has already flagged the disturbing trend of imports growing faster than exports and the rising proportion of debt in foreign capital inflows being witnessed in the recent period.
It was this combination of a widening current account deficit being financed by debt inflows from abroad, which had taken the Indian economy to the brink of a BoP crisis in July-August 2013 under the UPA rule. Complacency on this front will once again aggravate India’s external vulnerability.
The Prime Minister today is faced with a policy dilemma. The only way the Indian economy can be kept afloat today, in the face of collapsing private investment and unsteady exports growth, is by pursuing counter-cyclical fiscal policy.
In fact, the recent Rs 2 per litre cut in excise duties on petrol and diesel was a step in that direction, although a very timid and half-hearted one. What is required now is a strong and effective fiscal stimulus, combining enhanced public expenditure and major cuts in indirect taxes.
In order to make that policy shift, however, PM Modi needs to first acknowledge that his supply-side shocks like demonetisation and hasty implementation of the GST have caused more harm than good. But he seems to have already become a prisoner of his own rhetoric on demonetisation, GST, digitalisation and cashless economy.
Not only have these trivialities failed to generate additional revenues for the government, they are making it impossible for the prime minister to correct course today on substantive components of economic activity like capital formation, revival of bank credit and employment generation. His political fortunes may, therefore, sink along with the economy.