India on track for sustainable growth

A policy expert analyses if India's current rate of growth is any cause for worry or a sign of sustainable recovery. India increasingly attracts positive attention from foreign sources. This is evident when one meets with groups of foreign investors who see India as an attractive investment opportunity. This renewed investor interest in itself is not surprising given the rather uncertain and downbeat conditions in a large number of advanced and emerging economies. However, in domestic circles, there is a persistent conversation, tinged with varying shades of doubt, about India's current economic performance and future prospects. These doubts would seem to be surprising given recent Indian macroeconomic data. One reason for these doubts could be the lower growth of GDP (measured as Gross Value Addition, GVA in constant 2011-12 prices) to 7.1 per cent in the first quarter (April-June) of 2016-17 from 7.9 per cent in the previous quarter (January to March 2016) and also below 7.5 per cent annual growth registered during 2015-16. However, even at this lower late of economic growth India has retained its position as the fastest growing large economy in the world. This achievement is accompanied with a marked improvement in macroeconomic stability. Foreign exchange reserves have risen from $270 billion to $360 billion over the last three years; inflation brought down to less than 6 per cent from double digits; current account deficit reduced to a mere 1.3 per cent of the GDP; and public debt to GDP ratio held at less than 70 per cent. Thus, India has decisively moved out of the group of the 'fragile five' in which it found itself in August 2014. Auto sales that were sagging during 2012 to 2014 led the recovery with 7.8 per cent growth in 2015-16 and about 9 per cent in the first quarter of 2016-17. Domestic aviation sector has registered a strong growth of more than 20 per cent in recent months. Economic recovery from the downturn during the last two years of UPA government has been further strengthened by normal monsoons in 2016 after two successive of sub-normal rains. This data reflects the economy's glass being more than half full, thereby affording significant bragging rights to the government. Yet, doubts persist in the public domain. The pestering refrain, often in hushed tones, is that “it does not feel like 7 per cent growth”. The fizz and energy of 2003-2008, when growth was at similar levels is missing. The fundamental reason seems to be the questions about the GDP data, which have emerged, perhaps for the first time in India's case. Some international investment banks have estimated that according to the old GDP series, the current rate of growth is nearer to 5 per cent and not 7 per cent. Even the RBI and the office of the chief economic advisor in the Ministry of Finance itself are known to have questioned the current GDP data, which is based on a new series of GDP numbers released in January 2015. Due to methodological changes, the new GDP numbers are not comparable with years prior to 2011-12. Inevitably, the discomfort persists. The government, fully cognisant of these doubts about new GDP series, should have taken steps to clear this confusion and restore the credibility of India's GDP estimates. The CSO had promised to come up with comparable numbers for previous years by June 2016. This has not yet been done and needs urgent attention. It may be worth considering, given the persistent questioning about the new GDP series, setting up a high level expert group, including some international experts to conduct a review of the statistical system focusing on the methodology adopted for the new GDP series. Otherwise, the questioning will continue, investor confidence will not be restored and the much needed upturn in the investment cycle may not come about. But there are other lurking weaknesses. Skeptics point also to the persistent weakness in private corporate investment with fixed investment actually contracting by 3.1 per cent during April to June after declining by 1.9 per cent in the previous quarter. Thus, first six months of 2016 saw production capacities actually shrinking with deleterious consequences for much needed new jobs. With construction sector growth plummeting to 1.5 per cent from an already low average of about 4 per cent in 2015-16, jobs have truly scarce. Industrial sector growth at 6.8 per cent is supported by manufacturing growing at 9.6 per cent. The trouble is that this does not reconcile with Index of Industrial Production (IIP) data that shows industry and manufacturing output growing at a measly 0.6 per cent and a negative (-) 0.7 per cent for the same period! IIP data is supported by evidence of anemic credit off take by corporates from commercial banks. Exports have been on a declining trend since 2012-13 and in negative territory continuously for 18 months. In 2015-16, Indian exports were $262 billion compared to $306 billion in 2011-12. These have just perked up so that net exports (exports minus imports) have contributed positively to GDP growth during April to June 2016. This is, however, not good news because this has come about as a result of imports declining continuously over the past five quarters (20 months) by an average of about 4 per cent. This indicates ongoing overall weakness of economic activity. The services sector, that constitutes two-thirds of the GDP, registered a growth of 9.6 per cent during April-June. A deeper look, however, reveals that this has come principally from a 12.3 per cent growth in public administration, defence and other public services, which are all directly dependent on government expenditure. This is reflected in a sharp deterioration in fiscal aggregates, with 75 per cent of government's fiscal deficit target being used up within the first four months of the financial year! Given this mixed picture, should one be concerned or optimistic about India's economic prospects as we head into the festival season consumer spending, which is used as a barometer of economic health by private business It is certainly not a cause for unwarranted complacency. However, I do not support the Cassandras for two reasons. First, the 7 per cent (+) growth rates have come despite the crackdown on 'black money'. In the past, this accounted for a sizable 30-40 per cent of the total GDP. The cash/black economy has apparently turned turtle with serious negative impact on sectors such as real estate, construction and even manufacturing projects. A slightly lower rate of growth without the froth generated by the black economy is far superior as it lays down the foundation for a more sustainable recovery. More importantly perhaps, weaning the economy from the black or cash economy also ensures that the rising criminality that is associated with it is also reined back. This is huge blow at large scale corruption that had threatened to become systemic in the last years of UPA rule. The second reason for my optimism is that there is substantial work in progress (WIP) across government ministries and sectors. The tone and tenor of the bureaucracy has changed over the last 27 months of Modi's term. Governance has inarguably improved and significant progress has been made in de-bottlenecking large infrastructure projects. My recent book 'Modi and his Challenges' comprehensively enumerates the structural reform initiatives and large number of schemes launched during the past two years. WIP and other initiatives are monitored directly by the PMO, led by the workaholic prime minister. Flagship initiatives like Digital India, Skill India, Jan Dhan Program, railway investment, Udai Bonds, and of course the GST and Bankruptcy code among others are bound to accelerate the pace of economic growth during 2017 and 2018.