Economic Highlights
New Delhi, 7 November 2015
Economic Riddle
PROGRESS & CONTRADICTIONS
By Shivaji Sarkar
The Indian economy is in the course of a see-saw game. The
GDP growth at 7 to 7.5 per cent may not be high but it is not low either. Why then
is the impact not visible in the overall situation? The macro numbers do not
fit well with the facts on the ground—bank credit growth is weak, firms have
reported yet another quarter of weak profit growth and investment activity too is
weak.
The World Bank says the direction is right. The Asian
Development Bank (ADB) says the deceleration is broad-based, with private
consumption, manufacturing, and services all experiencing slower growth. The
official pitch is that it is in the first stages of an economic recovery. But
there are numerous doubts about this claim. It is not hard to come across
businessmen, investors and ordinary citizens who feel less upbeat than what the
economists feel they should.
Despite the festival season the mood is not
upbeat. The youth are not happy as jobs elude them. Domestic investors, small
and medium entrepreneurs and traders find the going not easy. This is so even as
Prime Minister Narendra Modi holds a meeting with top State and Central
bureaucrats to check why projects have not got off the ground. He is trying to
cut the red tape. This has helped revive Rs 3.9 lakh crore in Central and State
projects, according to the official data. His initiative has chipped away Rs
9.75 lakh crore backlog of roads, ports, railways, power stations and other
projects.
But the country suffers from a systemic problem.
Asia’s third largest economy suffers from a
bureaucratic inertia that Modi is trying to activate. BJP-ruled Maharashtra Chief
Minister Devendra Fadnavis is more candid. He says the bureaucracy is not
cooperating and hindering progress. He had to act against 800 of them. One can
understand the difficult task Modi is facing.
Undeniably, the bureaucracy needs a tough
overhaul, possibly starting with their training school at Mussoorie. Modi had
set an ambitious goal of firing up the notoriously slow bureaucracy and making India the 50 most
business-friendly destinations. This is partially paying off as the World Bank
ease of business indicator has shown.
The projects are usually held up thanks to a lack of
coordination between different departments and governments. The logjam is
difficult to resolve. Each bureaucracy is keen on showing its might over the
other.
Modi’s initiative to link up the bureaucracy through
video conferencing usually on the last Wednesday of every month tries to break
that logjam. But it has another problem. In a federal polity decision-making
gets centralized. Though many say that he has introduced a system of
cooperative functioning, where States with different political beliefs come
together to make the country work.
This is possibly working. Commercial bank credit
to the corporate sector is turning the corner with a growth of 10.2 per cent in
September 2015 higher than the lowest 9.5 per cent in August. It is lower than
the highest 26 per cent achieved in December 2010. This should not be worrying.
At the same time it also saw the banks having the highest NPAs of over Rs 3
lakh crore.
The total plan capital expenditure during April-August has
increased by over 38 per cent over the figures of 2014. It has cleared 8000 km
of highways, two of the 37 river-connecting projects. Railways and defence
ministries too have awarded large new projects.
Still the downcast prevails. One reason is said
to be that there has been a change by government statisticians. They have moved
to a new method of calculating output—market prices rather than factor costs.
There were many debates about how industrial output was measured in the new
series. The previous data was not recalculated and comparing data is a problem.
It is difficult to comprehend the new GDP data with the previous one. Again a
bureaucratic faux pas!
Goldman Sachs has recalculated Indian economic
growth all the way back to 1991. It shows economy is recovering, but is less
than the boom years till 2008. Then one needs to understand the two calculating
measures - GDP and GVA – gross valued added that includes taxes and subsidies.
The latest data for the first quarter of the current fiscal year shows the
Indian economy accelerated when one considers GVA but lost momentum when one
looks at GDP.
Then one does not understand why GDP decelerated
when indirect taxes have grown at a robust pace in nominal terms during the
first quarter while subsidies have decreased. National Statistical Commission Chairman
Pronob Sen said what matters is how the nominal tax collections are converted
into real terms. Net indirect taxes rose 39.9 per cent in nominal terms while
they increased only 6.5 per cent in real terms. Sen says that if taxes are
collected at higher rate collections rise but the impact is to be seen what
happens in real terms. So it pushes GDP down and shows higher GVA. Something
complex that Modi has to resolve.
The weak bank credit, mentioned above, says RBI
mask two developments. The decline in global oil prices that pulls down credit
needs of oil companies. Besides, many companies are raising their own funds
through bonds or commercial paper as it is cheaper than bank loans. According to
an IMF paper, the financial cycle may move at a different rhythm than the
business cycle.
There is another problem. The government’s clamp
down on black money – cash economy – is said to have rattled private businesses
in real estate, defence and some service sectors. There are no buyers of
properties. It has said to have hit almost half of the activities. Conspicuous
consumption is hit. Many investors have moved offshore. Official statistics do
not capture it but the magnitude is large.
This is a good futuristic move but the Government
also has to ponder how cash economy can remain “white”. There is need to
consider how it can increase government expenditure to maintain the momentum to
create jobs. Both tax man and prices have to be reined in.
So while macro numbers may not be reflecting the
reality, there are problems apart from official numbers that have to be
tackled. The economy is making moves and Modi has to take more initiatives to solve
the economic puzzle. ---INFA
(Copyright,
India News and Feature Alliance)
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