12/31/2015

Istheeconomysick?SalmanSozwritesonModigovernmentspolicyTheHindu

OPINIONCOMMENT

Published:December31,201500:58IST|Updated:December31,201508:03IST
December31,2015

Istheeconomysick?

SalmanAneesSoz

TheModigovernmentspolicyischokingdomesticdemandatatimewhenglobaldemandisalsoweak.Thisishardlyarecipefordouble
digitgrowth.
Thetitleseemsprovocative.Afterall,forthelastseveralmonths,wehaveallheardthatIndiaisnowthefastestgrowinglargeeconomyinthe
world.TheFinanceMinisterkeepsassuringusthatthecountryseconomicrevivalisonafirmfootingandthatIndiaiswitnessingsignificant
macroeconomicstability.ThePrimeMinistersMakeinIndiainitiative,theJAM(JanDhan,AadhaarandMobile)trinityaswellasthe
governmentsemphasisoneaseofdoingbusinessaresupposedlygamechangers.OnegetsthefeelingthattheIndianeconomyis
turbochargedandmajorprogressisaroundthecorner.Yet,therearealsoreportsofmanyeconomistsandanalystsindicatingthateconomic
growthdoesntfeelthatrobust.So,somethingdoesntfeelrightandthisfeelingisntgoingaway.Whenthingsdontfeelright,perhaps
wearedealingwithsomesickness.
Beforeweproceedfurtherwiththediagnosis,letusunderstandthecounterfactual.Inotherwords,whatdoesgoodeconomichealthlook
like?Forthis,letusturnbacktheclockjustalittlebit.Irevieweddatafor200506to201011,asixyearperiodwheneconomicgrowth
averagedalmost9percentperyear.Bydrawingacontrastwitheconomicconditionsthenwiththecurrentsituation,wemaygetasenseof
what,ifanything,isleadingustofeelthateverythingisnotwellwiththeeconomytoday.
Sixyearsofsunshine
Letsgetstraighttothebignumbers.Inthatsixyearperiod,IndiaexperiencedanaverageGDPgrowthrateofabout8.8percent.Infourout
ofsixyears,GDPgrowthexceeded9percent.Onlyin200809,ayearassociatedwiththeglobalfinancialcrisis,didgrowthfallbelow8per
cent.Thesehighgrowthyearsalsosawhighsavingsandinvestmentratios.Thesavings/GDPratioaveraged34percentandtheinvestment
ratio(grosscapitalformation/GDP)averaged36percent.Inaddition,exportsgrewatanannualrateof21percentandimportsgrewatan
evenhigherrateof23percent,reflectingrobustdemandbothinthedomesticandexternalmarkets.Thefiscaldeficitaveraged4.5percentof
GDPandthecurrentaccountdeficitwasabout1.9percentofGDP.ThisisroughlythesametimeperiodinwhichIndiareducedthenumber
ofpeoplelivinginextremepovertybyalmost130million.Thosesixyearswereterrific.Indiawasdoingexceptionallywelland,alongwith
China,providedsupportfortheglobaleconomyintheaftermathofthe2008crisis.
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12/31/2015

Istheeconomysick?SalmanSozwritesonModigovernmentspolicyTheHindu

Fastforwardtothepresent.SincethegovernmentrevisedGDPdata,thereisincreasingtalkofIndiasemergenceasthefastestgrowing
economy.Inaseaofglobaleconomicweakness,Indiaisapparentlyabuoyantforce.Buttherearemurmursthattheeconomyisnotasstrong
asthegovernmentwouldhaveusbelieve.Whatsgoingon?Letsagaingostraighttothebignumbers.Whilegrowthratewas7.3percentin
201415,variousofficialestimatespointtoagrowthrateof78percentin201516.Butsavingsandinvestmentratioshavedroppedsharply
toaround30percent.Exportgrowthhasdeclinedsharply.FromApriltoNovember2015,exportshavedroppedbyover18percent.Ifthis
trendcontinues,201516willseetheworstexportperformanceforover15years.Importgrowthhasalsodeclinedbydoubledigitsindicating
lackofdemand(andalsofallingpricesofcrude).TheaveragefiscaldeficitforthefirsttwoyearsoftheModigovernmentislikelytobearound
4percentwiththecurrentaccountdeficitaround1.3percentofGDP.Withoutlowercrudeprices,thesetwindeficitswouldbehigher,as
wouldinflation.
Withnumberssuchasthese,itisnowonderthatmanyareexpressingconcernsaboutthestateoftheeconomy.Thisisnotall.Thereare
reportsofwidespreadruraldistress,mixedperformanceoftheindustrialsector,continuedproblemsinthebankingsectorandlowprivate
sectorinvestmentsduetomarketuncertaintyandstressedcorporatebalancesheets.Withallofthesefactorsformingthefoundationofthe
economy,itiseasytoseewhysomethingdoesntfeelright.Inorderfortheeconomytomatchitsperformanceinthesixyearsdescribed
earlier,alothastogorightatatimewhenveryfewthingsappeartobegoingright.
Abridgetoofar
Oneofthethingshighlightedbythegovernmentasasuccessisfiscalconsolidation.Thatisafancytermforlowerfiscaldeficits.The
governmentsfiscaldeficittargetfor201516is3.9percentofGDP(slightlyhigherthantheearlierestimateof3.6percent).Someeconomists
believethatthegovernmentmustcontinueonthisfiscalconsolidationpathtogiveconfidencetoinvestorsthatmacroeconomicstabilityis
ofutmostimportance.Thisisallverywellifprivateinvestorsweresteppingintoinvestandcreatejobs.However,asIhavementioned
earlier,theyarenotdoingthat.So,thegovernmentistryingtoincreasepublicinvestmentasawayofboostingtheeconomy.Thisisexcellent
butnotthefullpicture.Thegovernmentsownmidtermreviewconcludesthatthepositivecontributionfromgreaterpublicinvestmentis
offsetbyacombinationoflowerotherexpendituresandhighertaxreceipts.Thisisinthecontextoflowerminimumsupportprices,lower
NREGAdisbursementsandahostofcutsinsocialsectorexpenditures.Thereviewsuggeststhatfiscalpolicywillbecontractionaryin201516
comparedto201415andhasfloatedtheideaofrelaxingthefiscaldeficittarget.
Ineffect,governmentpolicyischokingdomesticdemandatatimewhenglobaldemandisalsoweak.Thisishardlyarecipeforgrowingat
doubledigits.TheonlythingthatwillgrowindoubledigitsisthefrustrationformillionsofyoungIndianswhowonthavethepromisedjob
opportunities.AtatimewhenIndiashouldbeaggressivelygoingafteragreatershareoftheglobaleconomicpie,weareseekingcomfortin
fiscalmanagement.Atatimewhenweshouldbepromotingbiginvestmentsinourfoodsupplychain,wearechokingoffruraldemand.Ata
timewhenweshouldbeprovidingmajorincentivesforoursmallandmediumenterprisestomoderniseandcompetegloballyandemploy
youngpeople,weareaddingtothetaxburdenofthecommonmanwhocouldbecomeasourceofdemandforthesecompanies.Ourmajor
corporationsshouldbeencouragedtoinvestatatimeofglobalweaknessessothatwhendemandpicksup,theyarereadytotakeabigger
share.
Butourgovernmentappearstohaveavisiondeficitandasurplusofcomplacencythatisboundtoaddtothefeelingthatthingsarenotwell.
Havingsaidthis,Idontbelievetheeconomyissick.Itisinafunk.Itisthegovernmentthatappearssickandinneedofafiscaldeficitfever
reducer.
(SalmanAneesSoz,formerlywiththeWorldBank,isaspokespersonoftheIndianNationalCongress.Viewsexpressedarepersonal.)
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