The seatbelt sign has been on for more than a year. In his budget speech, Finance Minister Arun Jaitley had asked the crew to shut the doors and said the Indian economy was poised for takeoff. The recent meltdown in China evoked similar responses. “India can replace China as the next engine of global growth,” Jaitley said. The message is being repeated by Prime Minister Narendra Modi in the US.
Yet, numerous economic indicators have not reflected this sentiment — from the subdued quarterly GDP growth to declining non-farm credit, from softening rural demand to declining exports. On the same day as Modi was marketing the Digital India initiative in Silicon Valley, it was reported that in September alone, some Rs 6,000 crore was pulled out of capital markets by foreign investors. There is a gap between rhetoric and reality. Something is amiss and people are beginning to ask: What is the true picture of our economy today? With one-fourth of the Modi government’s tenure over, and the results of “Modinomics”, as opposed to “UPAnomics”, beginning to show in economic output, the time has come to evaluate the prospects for takeoff. We can start by looking closely at the RBI’s Annual Report 2015 and the Central Statistics Office’s quarterly GDP data report.
As per the CSO report, GDP growth moderated to 7 per cent in the first quarter of 2015-16, down from 7.3 per cent in 2014-15, which is only slightly higher than the 6.9 per cent clocked by the UPA in the turnaround year, 2013-14. The CSO reports stagnancy in private consumption growth, a decline in investment as measured by gross fixed capital formation, and a decline in government final consumption expenditure (from 12.1 per cent of the GDP to 11.4 per cent). Growth rates were down for the crucial agriculture and manufacturing sectors. The RBI’s Annual Report 2015 points to the urgent need to grapple with important structural constraints and banking asset quality concerns in order to sustain the growth process. The RBI is understandably concerned about the elevated banking sector risk due to the alarming level of NPAs and the related decline in non-food credit offtake.
Both reports points to two worrisome trends. First, the slowing down of growth in domestic consumption. Second, the declining level of investment in the GDP (for a second consecutive year). Consumption and investment, followed by net exports, are the most important drivers of an economy’s GDP. With exports also falling, all the important drivers of growth are weak.
The Indian economy has been known for its domestic consumption-led economic growth model, as distinct from China’s investment- and export-led model. Even in 2014, 69 per cent of output was driven by consumption (57 per cent household consumption, 12 per cent government) and only 24.4 per cent of the GDP was accounted for by investments and exports. In the same year, 50.8 per cent of Chinese GDP was driven by consumption, (36.8 per cent household, 14 per cent government), and a massive 48.8 per cent was investments plus exports. The low level of household consumption in China is seen as one of the major reasons for its slowdown, while India has remained insulated from the recent global recession partly because of strong domestic consumption.
Most theorists preach a balance between consumption and investment, and that is what the UPA seemed to have achieved when it hit the golden patch of 9 per cent-plus GDP growth in 2006-09. On balance, the UPA surely focused more on spurring domestic consumption by encouraging rural demand and expanding government expenditures. The MGNREGA, increases in MSPs for farmers, the farm loan waiver, food security act, slashing of interest rates for farm credit and across-the-board hikes in social-sector expenditures defined this approach. What is becoming clear now is that the NDA government is seeking to build a different narrative. It is tilting the balance in favour of investment, as opposed to consumption. On the one hand, there have been greater allocations for roads and railways, and a 5 per cent corporate tax cut to spur private investment, and on the other, reduced allocations for social/ rural sectors, meagre MSP increases for farmers, delays in implementing the food security act, etc. On the surface of it, this doesn’t seem like a flawed economic strategy; after all, we do need enhanced investment rates in sectors such as infrastructure to leap forward. But as the economic results of such an approach are unfolding, it is becoming clear that while the focus on spurring investment rates may be correct, taking domestic consumption growth for granted is proving counterproductive.
The NDA’s approach threatens to kill the goose that laid the golden eggs: domestic consumption growth. As the CSO report points out, private consumption growth is stagnating. Rural income growth has been stuck in the mid to low single-digits in 2015, far below the 20 per cent-plus clocked in 2011. Similarly, the latest data from the Labour Bureau shows that rural wages have registered an average annual growth of 3.8 per cent this year, the lowest since July 2005. All this is hitting India where it hurts most: Weak rural demand. For instance, sales figures for motorcycles and tractors are depressed.
In spite of the government wanting to follow the Chinese investment- and export-led growth model, investments and exports are not picking up. The timing of the government’s strategy is to be blamed. Asset quality concerns and the related risk aversion of banks, the impending rate hike by the US Federal Reserve and the “wait and watch” investment strategies of institutions, the global outflow from emerging markets and low domestic demand are some of the factors that are responsible for this. Low global demand levels are also keeping exports down.
Simply put, the reason the “takeoff” rhetoric is not translating into reality is because the government’s rightwing economic plan has left less in the hands of people who are, as a result, not spending enough. And the investments, which the NDA was hoping would compensate for this, are yet to firm up.
Let me clarify. I do, in fact, partially agree that there is an opportunity for the Indian economy to takeoff. But we need the right policy mix in place. The crash in crude and commodity prices has brought a windfall that a finance minister can only dream of. The Chinese slowdown puts India in the reckoning for global investment. Our own fundamentals have improved gradually over the last few years, anchored by fiscal consolidation and the easing of inflation. But the government has to seize the opportunity it has and deliver.
The writer is a Congress MP