Half-term report card on Modi government's economic progress
Pre-Budget consultations have been initiated by the finance ministry and this year's Union Budget has its own importance because it would be presented in the shadow of demonetisation and because GST is expected to see the light of day from the next fiscal.
Meanwhile, the NDA government completed its halfway mark in November and it is the appropriate time to take stock of expectations and achievements so far.
Keeping aside the benefits coming out of the mammoth demonetisation exercise, it’s arguably an economic disruption which will impact business in the short term and the RBI has even revised GDP growth estimates after considering this aspect.
Though GDP numbers are not the barometer of the economy, it is one of the prime indicators of economic progress and we have to choose other benchmarks also for comparison. Most importantly, we have to understand the legacy of the UPA and NDA regime to have an objective assessment of their performance.
On a comparative assessment, it appears that UPA-I got a flourishing economy in legacy while indicators suggest the economy was in sluggish mode when NDA-II assumed power, and it has managed to bring inflation down to a reasonable level along with increasing growth (refer table 1).
Some analysists have raised their concern over change of base year from 2004-05 to 2011-12, but it is a continuous phenomenon and developed nations like the UK revise the base year every five years.
Data released by MOSPI (refer table 3) clearly shows that our GDP is increasing on YoY basis and even if the argument of changing the base year is considered for a while, then revised GDP growth for FY 2013-14 was 6.9 per cent while it was 7.56 per cent for FY 2015-16 on the same parameters.
Apart from GDP, there are other widely accepted performance indicators to assess the economic scenario of any economy. Let’s look at them to have an understanding of the claims made by the government and the counter-voices.
1) Export-Import (foreign trade): Both exports and imports have declined over the past two years but it would be improper to draw a conclusion merely on the basis of overall numbers. According to details available with the ministry of commerce (refer table 2), there was significant decline in imports in FY 2013-14 while import of petroleum products remained the same that year.
If impact of decrease in import of petroleum is neutralised in FY 2014-15 then there was an increase in imports. Decrease in imports for FY 2015-16 is largely attributed by decrease in petroleum products imports and therefore the concern put forward by many analysts is not supported by data.
Similarly, if the impact of decrease in exports of petroleum is neutralised in FY 2014-15 then there was an increase in exports. Almost 55 per cent of decrease in exports for FY 2015-16 is attributed by decrease in export of petroleum products and the remaining is on account of global factors which has caused decrease in iron and steel, ships/boats etc.
It must be noted that export is dependent on the global economy also and conditions are such that Tata Steel was planning to sell its UK assets due to decline in demand. Moreover, export increased in June and the balance of trade situation has improved continuously over the years. One has to analyse commodity-wise import-export trend and mere analysis of overall import-export numbers are bound to give misleading results.
2) Fixed capital formation: Gross fixed capital formation (GFCF) is a measure of new value added which has been invested in the economy for further production. GFCF is increasing in absolute terms and the decline in GFCF as percentage of GDP is bound to happen when the size of GDP grows.
However, this point needs some attention since GFCF as percentage of GDP has gone below the psychological level of 30 per cent (GFCF at current prices). The government has already spent half of its tenure and any new investment will take substantial time to yield results and therefore more focus should be on ongoing projects and schemes where results can be visible in the near future.
3) Other key indicators: There are various other indicators of the economy which indicates that the Indian economy is doing far better under NDA II as compared to UPA regime (refer table 4).
FDI inflows in the current financial year are also on a similar trend and overall FDI inflow is $29,016 million for the six months ended September 2016, in which $21,624 million was towards equity investment.
India is a capital-scarce country and we need foreign investment to mobilise growth and increase in FDI is a good sign (although sectoral representation by FDI is still a concern as priority sectors and the infrastructure sector are not the major beneficiaries of FDI).
Nikkei’s Purchasing Managers Index (PMI), which is used to review the expansion of any particular sector, clearly indicates that both manufacturing and service sectors are doing better under NDA.
Areas of concern for the Modi government
A robust banking sector is the backbone of any economy. Banks keep the investment cycle moving, which in turn helps in pushing growth and generates employment. Currently, banks are facing the issue of rising NPAs as well as shrinking credit.
Both of these matters are a serious cause of concern because a large part of NPAs belongs to government-owned banks and a decline in bank loan clearly means that growth will take a blow. Everyone is in wait-and-watch mode and hoping that decline in credit is temporary, which is primarily due to disruption caused by demonetisation.
Although a period of two-and-a-half years is too short for visualising any significant change in a vast economy like India, since the government has already crossed its halfway mark, people want to know the tangible changes that have come to their life, and this is the area where complacency of elected representatives is costing the government.
Forget about financial data, even the importance and benefits of social welfare schemes launched as the JAM trinity (Jan-Dhan, Aadhaar, Mobile) are not reaching the masses.
Economists and analysts would continue to take stock of economic performance but it’s an appropriate time for the government too to carry out a self-appraisal and highlight achievements along with taking corrective and accelerated steps to meet the targeted results.
Also read: Demonetisation has crippled India's economic dreams
Also read: Demonetisation: Why banks could be the biggest loser