Is the economy back on track?

Updated - March 23, 2018 07:49 pm IST

Published - March 23, 2018 12:15 am IST

YES |Jagdish Shettigar

Disturbances on account of demonetisation and GST were purely short term


Looking at various indicators such as an increasing trend in the Index of Industrial Production (IIP) and GDP growth rates, there is a clear signal that the economy is back on track. Disturbances on account of demonetisation and the goods and services tax (GST) were purely short term, and short-term disturbances were only to be expected. Employment-generating sectors like construction, the worst hit by demonetisation, have already started reviving — demand is picking up because of falling prices and this is obviously due to minimum exposure to black money. There are indications that the government is realising the need to move towards the ideal GST by addressing the glitches experienced at present. Moreover, with the revival of India's major markets such as the U.S., Eurozone and Japan since September 2017, exports have started picking up, accounting for about 15% of the GDP.

Fixing the rural economy

However, a major challenge is the worsening rural crisis. It is worth recalling that India was insulated from the sub-prime crisis in 2008-09 mainly because of the rural economy. The rural economy’s contribution to GDP may not be significant. But in terms of aggregate demand, the rural population impacts more than 50% of the market base. What I mean is, when you talk about markets, you talk about population. And in terms of purchasing power, half the population is still in the villages and is very crucial for the growth we are looking for.

On the agricultural front, while the increasing input costs have to be borne by the farmers, when it comes to reaping the benefits of market prices for agricultural produce or rise in minimum support prices (MSP), they are deprived as they do not have direct access to the market. Unless these fundamental problems are addressed and corrective steps initiated, there is no point in simply raising the MSP which benefits middlemen.

Similarly, farmers should be enabled to play their role as an effective supply force in the market and be in a position to sell their produce at a competitive price. That is possible only when adequate infrastructure support is built for them. Unfortunately, the wisdom of both the government and the opposition does not extend beyond traditional approaches like MSP or farm loan waivers.

Three major challenges

On the external front, the government faces three major challenges: the Federal Reserve’s approach, rising crude oil prices, and the move towards protectionism by India’s major export market, the U.S.

It is reported that the Federal Reserve is in for three hikes in the next one year. This may upset not only the stock market but also rates of exchange. Withdrawal by foreign institutional investors in response to federal hikes may weaken the Indian currency and end up in a higher import bill, especially on the crude oil front, if exports do not pick up. The government has to bring about strong reform measures. However, it may not take the risk during an election year. Against this background, policymakers should not venture into countering FIIs’ withdrawal by forcing domestic institutional investors such as LIC, UTI, or public sector banks to enter the market as it may lead to the creation of a bubble economy.

Rising crude prices is another challenge, especially in terms of imported inflation. Another negative signal is the U.S.’s initiatives in terms of protectionism.

As told to Anuradha Raman

Jagdish Shettigar is professor at the Birla Institute of Management Technology


NO | Arun Kumar

India’s actual rate of growth will continue to remain close to zero


The latest quarterly growth data suggest that the economy is growing at more than 7% per annum. This implies that the economy is back on track after the slowdown post demonetisation and GST. But is it? The economy was slowing down quarter after quarter after the peak (9.1%) in Q4 2015-16. It declined to 5.7% in Q4 of 2016-17 but is now growing at above 7%, giving the impression of recovery. Unfortunately, protests by the youth, farmers and traders suggest that large sections of the population face hardships. Many businesses are doing better but complain of difficulties. The feel-good factor is missing in the economy as a whole.

The unorganised sector

The official data fail to represent the reality of the Indian economy since the actual growth rate is not more than 1%. This is because the unorganised sector, which accounts for about 45% of the GDP, has been badly hit by demonetisation and GST. The non-agriculture component of this sector contribute to 31% of the GDP. Even if it declines by 10%, while the rest of the economy grows at the officially given rate, the growth rate for the economy would be 1%. Agriculture also faces a crisis of income. The unorganised sector employs 94% of the Indian workforce. A decline in this component impacts employment. That is why the youth are protesting. The rise in demand under the MGNREGS is an indication of unemployment. Trade, a large component of this sector, has also been hurt.

The estimation of quarterly growth is largely based on corporate sector data. The data for the unorganised non-agriculture sector are obtained only in reference years. In between these years, it is largely assumed that it is growing at the same rate as the organised sector. This method is alright only if there is no shock to the economy. A shock like demonetisation changes the relative rates of growth of the organised and unorganised components of the economy. So, what was applicable on November 7, 2016, is not applicable on November 9 and after that.

Comparing the two sectors

The two shocks have created two separate circles of growth. The organised sector has benefited from them at the expense of the unorganised sector. For instance, the efficiency due to GST benefits the organised sector but adversely impacts the unorganised sector due to complexity of the tax and poor design. The former is displacing the latter. In brief, the organised sector is growing faster while the unorganised sector is declining. Thus, while the data show an increase in growth rate, the overall economy is stagnating. The official rate of growth has also accelerated due to the sharp decline in the economy post-demonetisation.

The decline in the unorganised sector has impacted demand. Large parts of the economy have not seen an increase in capacity utilisation. That is why the investment rate has not picked up and credit offtake remains weak. The government needed to sharply increase public investment but is constrained by the fiscal deficit target. The twin balance sheet problem of banks makes investment difficult in critical infrastructure areas.

The external sector is also rather unstable. Protectionism is growing, the U.S. has lowered the corporate tax rate sharply so that capital inflows will slow down. In brief, India faces twin uncertainties – internal and external. This is likely to impact investment, as a result of which the official growth rate based on the organized sector will not rise. India’s actual rate of growth will continue to remain close to zero.

Arun Kumar is professor at the Indian Institute of Social Science




Corporate India is well on its way to recovery. It's time the focus shifted to non-corporate India

The complete state of the economy is something we do not know till about two years after the end of the financial year. In the interim, whether we are talking about the quarterly data or the initial estimates of the annual figures, they are mostly based on extrapolations of corporate performance. Almost all the high frequency indicators are from the corporate sector, other than a few like agriculture and, to a certain extent, the sales tax data, which are an indicator for the trade sector. Because of this, what we measure is in fact the performance of the corporate sector. The data that we already have do seem to indicate that corporate India is coming out of the headwinds it was facing earlier in the year, post demonetisation and GST.

The non-corporate sector

Regarding the non-corporate sector, the only indicator of hard data that we have is for the agriculture sector. In this sector, we do know that production has done reasonably well in terms of physical output. However, the price data seem to indicate that the real income received by the farmers has either not grown or may in fact have shrunk. The non-corporate sector accounts for 45% of the economy, of which agriculture is 17%. So, we have no information about the remaining 28%. While we don’t have hard evidence, the corroborative evidence would tend to suggest that this sector is still probably not doing very well.

Having said that, the corporate sector is certainly coming out. But the impact of the problems in the banking sector have still not fully manifested themselves. There is a positive to it, which is that over the recent months there has been a fairly substantial increase in the raising of equity through IPOs as well as through new bond issues by corporates. However, both these options are available only to a relatively small sub-segment of the corporate sector.

With the pressure on the banking sector now, my fear is that the compression is going to come at the lower end of the economy, the smaller players, in terms of getting credit that they need for investments. The problem may well be that we may see reasonably strong recovery in terms of growth rates being in the 7%-plus area, with the smaller units suffering. That is bad news for employment. We have a situation where the pace of increase in capital intensity has been going up. Automation makes sense for relatively larger companies. Because of that, you have to think about the size of the companies you want to see coming up. The large growing larger is actually bad news for employment. What you would ideally like is start-ups starting small and then ramping up. That’s how employment will be created.

Question of investments

The issue of getting back on track to high growth hinges on what is happening to investments. There we have run into a little bit of a data issue. For 2016-17, the Central Statistics Office had originally given the fixed capital formation growth as 2.4%; now they have revised it to 10.1%. Depending on what you happen to believe in, you either don’t have investments happening or you have very healthy investments.

Services were doing reasonably well, on the back of two sectors — government and the financial sector. Of late, both have slowed down quite dramatically due to budgetary constraints and the banking problem, respectively.

In conclusion, corporate India is well on its way to recovery. It’s time to shift the focus to non-corporate India.

As told to T.C.A. Sharad Raghavan

Pronab Sen is former Chairman of the National Statistical Commission, and country director, India Central Programme of the International Growth Centre

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