Economic blues. Where are the green shoots, Jaitley?
It is that time of the year again when we take stock of the year gone by. This is possibly a good point in time for an individual, but not for companies and nations. For them the year is always the financial year, that usually is April 1 to March 31, and hence data needed to judge performance is always incomplete. Things could get better or worsen by much in the last quarter, but editors are unwilling to wait till and want the chronological year assessed in December.
However, even if just three quarters of the year have almost gone by, the main trends are very discernable. The most obvious one is that the economy has slowed down considerably. The government has now slashed its full-year economic growth forecast to 7-7.5 per cent from its mid-year forecast of 8.1-8.5 per cent made in February. With a full quarter to go, and no new credible government impetus possible, it looks like even 7 per cent may be a bridge too far.
We must not forget that these GDP numbers have an inbuilt padding in them. The GDP growth rate was tweaked a bit in February this year to put India on a higher trajectory, by giving itself an added 2.2 per cent as a bonus by resorting to some statistical legerdemain. The past practice was to compute GDP growth on factor costs. This has now been changed to constant prices to take into account gross value addition in goods and services as well as indirect taxes. Besides, the base year was also shifted to 2011-12 from the earlier 2004-05. This may even be the better way, but then even the years before would not look so bad.
By this measure growth in the last year of the UPA government would have been a good-looking 6.9 per cent, instead of the dismal 4.7 per cent calculated then. The current year-end projection means that even a full two years after Manmohan Singh demitted office the GDP has grown a mere 0.5 per cent. We have had a surfeit of announcements and pronouncements by the Prime Minister, but man ki baat bataun tho, this reminds me of the Spanish proverb “the mountain labored and brought forth a mouse.” Take out the bonus of 2.2 per cent and you have a more plausible growth of 5.2 per cent, which is in line with the original IMF forecast.
Nominal GDP growth rates are measures at current market prices and corporate profitability also usually grows at that pace. For example, India’s nominal GDP growth used to be in the range of 12-15 per cent in the past several years and corporate profitability also used to be in that range too. The inflation rate is reduced from nominal GDP growth rate to calculate the real GDP growth rate. Since Indian inflation used to be in the range of 4-8 per cent in the past, the real GDP growth rate used to be in range of 6-9 per cent.
In the budget for 2015-16 the Finance Minister set a nominal GDP growth target of 11.5 per cent. But the GDP growth of 7.4 per cent that he is crowing about is the real GDP growth. He is comparing apples with oranges. You get real GDP growth after adjusting nominal GDP growth for inflation. But in 2015-16 we have a deflation of about 2.2 per cent, this means the nominal GDP growth is 5.2 per cent, and that the government is 6.3 per cent off the target.
Recently the Finance Minister optimistically said that he can now see “green shoots.” Green shoots is a new age term favored by bullish merchant bankers and other flimflam people to describe signs of economic recovery or positive data during an economic downturn. The term green shoots is a reference to plant growth and recovery, and has been used during down economies to describe signs of similar growth. December is a month when green shoots are hardly ever seen in nature. Most of us who keep looking at the economy cant see any of the green shoots that only Arun Jaitley seems to see.
If I were looking for green shoots, the first place to look at would be the growth of credit by scheduled commercial banks. For the six critical sectors, namely, Industries, Manufacturing, Mining, Electricity, Construction and Other Infrastructure as compared to April –September 2014-15 and 2015-16 growths have perceptibly moved into the slow lane. Credit off take growth for Manufacturing has fallen from 21 per cent to 7.1 per cent. Construction sector off take has slowed down from 27.4 per cent to 4.1 per cent. Mining credit off take has fallen from 17. 1 per cent to a negative 8.2 per cent. Only Electricity credit off take has just about held course by dropping from 13.7 per cent to 12.7 per cent. Industries credit off take has also perceptibly slowed down from 9.6 per cent to 5.2 per cent.
Not surprisingly then capital expenditure has slowed down to a crawl. Kotak Institutional Securities which analysed capex plans of 130 large companies says that capex for the next fiscal – 2017 might actually decline by a huge 15 per cent. It declined by 3.9 per cent 2015, and is predicted to further decline to 4.1 per cent in 2016. With private sector becoming skittuish it is for the State to take the lead and step up its capital expenditure. But the NDA too is afflicted by the UPA2 disease of splurging on subsidies, salaries and show rather that investing in the future.
Accompanying the declining trend is capex, the investment in new power plants has also fallen off the table. In 2010, 46 power generation projects were granted transmission connectivity to get hooked on to the national electricity grid. This number is down to just two projects each in 2014 and in the first eleven months of 2015. Both the two thermal projects granted connectivity in 2015 are by PSU's compared to 35 private projects five years ago. This sharp drop will hurt with huge power shortages when the economy is ready to pick up again. Power plants have long gestation periods and the time to invest in them is when the economy is slow - now. But the government is still in deep slumber.
Any farmer will tell you that the time for credit is when preparing the land, buying seed, pesticides and fertilizers, and investing in equipment. After that he waits for nature to play its role and for green shoots to emerge. Our Finance Minister however is hoping for green shoots without the credit off take that goes before it. While we are on green shoots look what happened to credit to agriculture and allied activities. This increased by just 11.1 per cent in June 2015 as compared with an increase of 18.8 per cent in June 2014.
A confluence of hostile weather that hurt agricultural output, high rural consumer inflation, and fall in seasonal employment as farm and construction labor has squeezed rural demand. One other major man-made factor in this is that the present government, in its anxiety to tamp down inflation, did not continue with the trend of higher farm support prices established by the UPA.
This added to the woes of the rural sector, which also saw the return exodus of construction labor from abandoned projects. Between 2004-04 and 2011-12, an estimated 37 million people left the farm sector. The resultant labor shortages were reflected in rural wages, which grew by 15-20 per cent each year. During the past year rural wages only grew by 6 per cent. The growth of motorcycle sales, which are considered a bellwether of the rural economy, has now become sluggish. While two wheeler sales rose by 8.09 per cent to hit 1.60 million in 2015, motorcycles have only grown by 2.5 per cent to 1.07 million. Tractor sales have fallen from 6.3 lakhs annually to 5.51 lakhs last year.
India’s merchandise exports contracted for the 12th straight month in November on the back of a weak global recovery. Indian exports fell 24.4 per cent in November, dropping to $20 billion. Exports had also contracted by 17.5 per cent in October. Imports fell sharply by 30 per cent in November to $29.7 billion, led by a fall in both oil and non-oil imports. Almost all categories of imported items, other than pulses, fruits and vegetables and electronic goods, saw a decline in November.
The stock broking firm Motilal Oswal Securities Ltd estimates corporate profit as a percentage of GDP in 2015-16 may drop to 3.9 per cent, the lowest since 2003-04. The aggregate profit of Indian firms is likely to be stagnant at around Rs. 4 lakh crores. The Savings to GDP ratio has been stagnant at about 28 per cent, having fallen from a peak of 38.1 per cent in 2008. So where is the money for investment going to come from?
The government needs to summon the political will to step up capital expenditure by trimming subsidies, more efficient, intelligent and diligent taxation and by attracting more foreign direct investment, not only in industry but even more so in infrastructure expansion and modernization. Till then green shoots will be just like shaven grass strewn on a doctored cricket pitch. Something Finance Minister and Delhi cricket czar Arun Jaitley is very familiar with.
(This post first appeared on the writer's Facebook wall as well as in Deccan Chronicle.)