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Economy is progressing, contradictions remain, Modi has to resolve it

 

Indian economy is through a see-saw game. The GDP growth at 7 to 7.5 percent may not be high but it is not low either. But why the impact of that is not visible in the overall situations? 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 is weak.

World Bank says the direction is right. 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 lots of 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 is not happy as jobs elude him. Domestic investors, small and medium entrepreneurs and traders find the going not easy.

This is so 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 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. 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.

The bureaucracy needs a tough overhaul possibly starting with their training school at Mussoorie. Modi had set an ambitious goal of firing up notoriously slow bureaucracy and making India the 50 most business-friendly destinations. It is partially paying as the WB ease of business indicator has shown.

The projects are usually held up by 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 in 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.

It 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 percent in August. It is lower than the highest 26 percent achieved in December 2010. It should not be worrying. That also saw the banks having highest NPAs of over Rs 3 lakh crore.

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 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 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 percent in nominal terms while they increased only 6.5 percent 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 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.

It is good futuristic move but the government also has to ponder how cash economy can remain “white”. He needs to ponder how it can increase government expenditure to maintain the momentum to create jobs. Tax man and prices have to be reined in.

So while macro numbers may not be reflecting the reality, there are also 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.

 

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