Blog Post

Mirror, Mirror on the wall

Rajiv Kumar 8 June 2017

Having just returned from Italy meeting investors, academics and officials, I find the gulf between the foreigners’ perception of India’s economic story and that of domestic commentators most perplexing. Could it be that the latter are focusing excessively on the here and now, while foreign investors and domestic stock markets are looking more at what is unfolding and not the past?

For the record, GDP growth in Q4 of 2016-17 declined to 6.1% and gross value added (GVA, which is GDP minus taxes) growth fell correspondingly to 5.6%. It may be worth noting that in Q4 of 2013-14, economic growth was lower with GDP at 5.8% and GVA at 5.3%. It is also patently wrong to assert that the NDA inherited an economy on the rise. Quite the contrary. Quarterly GVA growth in 2012-13, the penultimate year of the UPA, ranged between 4.1% (Q4) and 6.2% (Q2) with GVA growth averaging only 4.8%.

Yes, it did improve in the first three quarters of 2013-14. But then it plummeted to 5.3% in Q4. These represented a major decline from an average of 8.3% during 2003-11 and is certainly not indicative of an economy in robust health.

Admittedly, GVA growth rate in 2016-17 at 6.7% is a full1.2% lower than the 7.9% in 2015-16. But economic growth in 2016-17 was still higher than in the last two years of the UPA. Also, it is quite dishonest to attribute all of this 1.2% decline to demonetisation. Economic slowdown had started in the first half of 2015-16, with quarterly growth rates sliding down to 7.2% from 8.7% in Q4 of 2014-15. So, demonetisation’s impact can, at best, be seen as a 0.5% decline in GVA growth.

It is quite ironic to see commentators going on about the irrationality of demonetisation. For the large majority of Indians and economists, a 0.5% decline in GVA growth rate for one quarter has been well worth the cost for strongly signalling zero tolerance for black money, reducing the role of cash in the economy, accelerating the formalisation of the tax-evading informal economy, and promoting digitisation.

Around18 lakh bank accounts have reportedly received an average of .₹ 3.3 crore in dubious deposits. This has brought .₹ 5.4 lakh crore of ‘undeclared income’ in the crosshairs of tax authorities. A fiscal windfall gain may still happen, stubborn and irrational denial notwithstanding.

Hard data reveals that many leading indicators of economic activity in Q4 of 2016-17, the worst performing qu- arter under Narendra Modi, are in better shape than in 2013.

With leading indicators pointing to a cyclical turnaround, and many necessary steps having been taken to usher in better governance and structural reforms like the goods and services tax (GST) and the bankruptcy law, Modi can now expect the economy to be on path of sustained and rapid economic growth. Moreover, by implementing important measures to ensure greater inclusion and improving delivery of public services — better targeting of subsidies included — he has preempted any castigation for ignoring the welfare of those who have remained excluded from the benefits of growth so far.

There are two items with substantial negative growth: capital goods and cement output. When seen in conjunction with the sharp decline in the construction sector, these point towards the crucial lack of response from domestic investors so far. Cre- dit offtake from commercial banks for industry has been declining in the last few quarters. This can have serious fallouts if not corrected.

Real estate prices and demand have both taken a significant hit with ‘cash-driven speculative demand’ turning turtle as a consequence of demonetisation. Modi must urgently address this weakness, even if he gets no help from Niti Aayog, which has maintained an inexplicable silence on this issue so far.

So, the most critical task at hand is to boost construction, especially the affordable housing sector. Road transport, highways and shipping minister Nitin Gadkari is doing his bit by ramping up highway construction, which is soon likely to achieve a record of 30 km a day. The PMO must focus far more sharply on speeding up affordable housing programmes and take it up on a mission mode.

With inflation and inflationary expectations now seemingly under control, RBI should also contribute by bringing down the real cost of borrowing. This will stoke up private demand for housing that, with its extensive multiplier effects, has the potential to trigger an upward swing in the domestic investment cycle. A long period of sustainable and inclusive growth would then ensue, proving the Cassandras wrong.

Rajiv Kumar, Fellow, Pahle India Foundation.