We should be happy that the Indian economy, according to the government, grew at an average of 7.4 per cent (new series) in 2014-15 and 2015-16. According to the government’s estimate, in the current year too, the GDP will grow at about 7.5 per cent.
We should be happy that the Indian economy will be among the fastest growing large economies of the world. Currently, WPI inflation is about 3.15 per cent and CPI inflation is about 3.63 per cent. The fiscal deficit will be contained at 3.5 per cent as projected in the Budget for 2016-17. Foreign exchange reserves are at a healthy level of about USD 360 billion.
As 2016 draws to a close, the whole country should be celebrating the state of the economy, but there is no joy anywhere. Why are the people sullen, dejected and apprehensive about the immediate future? The proximate cause is, undoubtedly, demonetisation (about which I have written extensively), but there are deeper causes. The frowns on the faces of those in the government (and especially of those key officials who have chosen diplomatic silence!) tell a story that is very different from the boast of the ‘fastest growing large economy’. Let’s look at five of the causes:
1. The confidence of foreign investors has been rudely shaken. Foreign Portfolio Investment (FPI) is a standard metric. Until October 2016, net FPI was positive at Rs 43,428 crore. In November and December, the flow reversed dramatically, and FPI outflow was
Rs 66,137 crore, leaving net FPI at negative Rs 22,709 crore. The last time net FPI was negative was in 2008 when there was an unprecedented international financial crisis. If it was a ‘flight to safety’ in 2008, it is a ‘flight from uncertainty’ in 2016. Will the uncertainty end and the foreign investor return soon is the unresolved question before the government and the country.
2. In December 2015, the Index of Industrial Production (IIP) stood at 184.2. In April 2016, it was 175.5 and in October 2016, it was 178. IIP is an indicator of the health of the manufacturing sector. The decline in the index speaks for itself. The worst hit is the consumer non-durables segment which is down 25 per cent. The capital goods segment is down 6 per cent. We should not be surprised if the IIP for March 2017 is lower than the IIP for April 2016, making it a rare year when industrial production actually declined during the year. Whither Make in India?
3. Credit growth is a measure of economic activity. At the end of November 2016, year on year credit growth was 6.63 per cent, a historical low, and we must go back many decades to find a lower level. Of this, non-food credit grew by 6.99 per cent. Medium-scale industries (textiles, sugar, cement, jute) is the segment where one could find regular, non-casual employment. Credit growth to medium-scale industries, year on year, has registered negative growth every month since June 2015. If we go down to the small and micro industries, the situation is worse. Currently, credit growth to small and micro industries is at (-)4.29 per cent. Demonetisation was the last straw and many of them have shut down and thrown out of employment millions of workers.
4. While credit growth remains sluggish — indicating that there is little demand for investment credit — the gross NPA situation has worsened between September 2015 and September 2016 from 5.1 per cent to 9.1 per cent. It is, as the saying goes, a double whammy for the banking sector. Banks have few takers for credit and, at the same time, banks are unable to recover loans. The inescapable conclusion is that the promised revival of the industrial sector remains a promise and there are no signs of revival.
5. Exports are a reliable measure of the manufacturing capabilities as well as the competitiveness of an economy. Look at the value of non-petroleum merchandise exports during the period January to November in the past few years:
2012: 218.79 billion USD
While some portion of the decline can be attributed to global factors like Brexit and protectionism, the main reason is erosion of the strengths of the manufacturing sector in India. The stark truth is that when merchandise exports decline, markets are lost and jobs are axed. It is not easy to regain lost markets because some other country would have stepped in to meet the demand. Neither the Prime Minister nor the Finance Minister has rung the alarm bells about declining merchandise exports. We have not heard a serious conversation about ways and means to reverse the situation.
After surgical strikes I have highlighted only five issues that are indicative of the health of the economy. It will be evident to unbiased observers that all five issues — FPI, IIP, credit growth, NPA and exports — have been adversely affected by demonetisation. So, if anything, the state of the Indian economy has become worse since the massive disruption caused by demonetisation on November 8, 2016.
I cannot end this column without making a brief reference to the price that we are paying for the other ‘surgical strike’. Since the ‘surgical strike’ (September 30) to end infiltrations and terrorist attacks, 33 security personnel have lost their lives in Jammu & Kashmir. As on December 25, the death toll of security personnel was 87, which is double the number of 2015. RIP, brave soldier.
I wish you a Happy New Year. I sincerely wish that my wish will come true.
Website: pchidambaram.in @Pchidambaram_IN