Absurd to Depend on China’s Slowdown to Celebrate India’s Growth

Mani Shankar Aiyar
Mani Shankar Aiyar

What’s with our economy? A year after Modi, says a knowledgeable foreign observer, the “Modi aura” is gone. The stock market hysteria over his election has faded. The biggest hope of the Government is that the deceleration in the Chinese economy will continue, so that we can claim that we are growing faster than China.

But it seems a bit absurd to pitch our hopes for growth on the Chinese growth rate waning. For the truth of the matter, as the Governor of the Reserve Bank of India said last week, is that “Growth is very weak”.

Therein lies the paradox. The official annual Economic Survey, released on the eve of the Budget, displayed on its cover a chart showing the Indian growth rate overtaking the Chinese growth curve. What cause for celebration is there in China slipping so badly that even India is overtaking it? The false euphoria was partly the result of the Central Statistical Office (CSO) changing the database for calculating India’s GDP. The new database projected our growth rate as having soared over 7 per cent and being all set to breach 8 in the next year and 10 before Modi has to face the electorate again.

Nothing, however, has changed in our lives. It is only in the realm of statistical abstraction that the miracle is occurring. For, along with declaring the plus-seven acceleration in growth rates, the CSO also had to admit that on the new basis the Indian economy would have achieved nearly seven in the last year of Dr. Manmohan Singh and P. Chidambaram. It seems extraordinary that the Congress was punished as badly as it was for accelerating the growth rate to seven percent where we were being pilloried in the campaign for having brought it to below five!

The collateral evidence also points to Governor Rajan’s assessment of the economy being far sounder than Arun Jaitley’s hype. The economy basically comprises three segments: agriculture; industry; and services. Let’s take each in turn.

Agriculture has been Modi’s disaster area. He decisively shifted governmental attention away from the farmer and the khet-mazdoor just at the time they needed him most through his obsession with compulsory land acquisition. For agricultural growth collapsed in Modi’s first year to just one percent and is in imminent danger of collapsing into a negative figure if the current forecasts of the Indian Meteorological Department (IMD), on which Governor Rajan has relied, turn out to be anywhere near accurate.

Rajan drew attention to the IMD “predicting that the southwest monsoon will be seven percent below the long period average”. He added, ominously, “This has been exacerbated by the confirmation of El Nino by the Australian Bureau of Meteorology”. He apprehends a contraction in foodgrain production by as much as five percent even in comparison to last year’s dreary 1.1 percent performance. He also underlines the “worsening of the situation” with damage to key crops in the food basket like oilseeds and pulses, stressing that buffer stocks for these key requirements “are not available in the central pool”.

Runaway food prices are bound to take the shine off price control achieved by the weakening last year of oil prices, especially as, to quote the Governor again, “crude prices have been firming amidst considerable volatility, and geo-political risks are ever-present”. Managing the “impact of low production on inflation” should be the government’s first priority. Modi instead is planning his frequent flyer miles!

Industry, including infrastructure, on which Modi pins his high hopes is floundering. “In April,” that is, the immediate aftermath of the Budget, notes the Governor, “output from core industries constituting 38 percent of the index of industrial production declined across the board”, coal being the single exception. The Governor spoke of the desperate need to unclog stalled investment projects, stabilize investment intentions of the private sector and end the “sustained weakness of rural consumption” to get manufacturing moving again. None of this points to an economy in revival. Capacity utilization needs to be raised, earnings performance improved, and sales of commercial vehicles and tractors vastly augmented. How can a Government in denial, boasting that it has brought “achhe din”, address itself meaningfully to such challenges when it is investing all its money in full-page, front-page ads proclaiming that India has never had it so good? The fact is India has never been had so good.

Moreover, banking is also in a mess, which is fundamentally why commercial banks are unable and unwilling to pass on successive reductions in repo rates (short term lending rates) to borrowers. They have piled up huge bad loans (politely called Non-Performing Assets – NPAs). So little is the CSO’s mythology impacting on bank lending that whereas a GDP growth rate of plus seven percent should result in a 17 percent increase in bank lending, the increase on the ground is a sluggish 12 percent. Either the CSO’s GDP figures are a fiction or the banking system is too weighed down to respond. No wonder bank stocks are in agony, the shares of banking giants like Punjab National Bank, Canara Bank and Bank of Baroda having lost 26 to 37 percent of their value in just the first half of this calendar year. Where one would have expected whoops of joy at the repo rate having been cut, the Bank Nifty lost nearly 640 points in the wake of the RBI announcement – such is the mess in banking.

Exports are just as bad or worse. “Merchandise exports” intones our Governor, “has weakened steadily since July 2014 and entered into contraction from January 2015 through April”, adding more alarmingly “with a recent shrinking of even volumes exported”. From there comes the dire prediction that “net exports are, therefore, unlikely to contribute as much to growth going forward as they did in the past financial year”. Worse still, “the year 2015 has begun with net portfolio outflows”. Then, from where are Modi-Jaitley going to get their acceleration in GDP to 8 percent – especially as “consequently, growth will depend more on a strengthening of domestic final demand”. There is no sign of that.

For the better part of the last two decades, the “services” sector, particularly IT, has been the last hope of the Indian economy. Under Modi, even IT is taking a hit, “leading indicators of services sector are emitting mixed signals,” as the Governor delicately puts it. There is, he adds, a “slowdown in new business orders”.

The RBI Governor has no political role to play. He has no constituency to cater to. He is independent and has been appointed on the basis of his proven expertise. He is expected to make use of that independence and expertise to tell the truth about the economy in the hope that the truth will make the government sit up. Instead, the Finance Minister diddles the public by saying that since the expected shortage in rainfall is likely to be widespread rather than concentrated, this makes for optimism.

Bizarre! If he and the Prime Minister continue to wear blinkers over their eyes, the nation is in for an even worse 2015-16 than 2014-15 proved to be.


(Mani Shankar Aiyar is a Congress MP in the Rajya Sabha.)

Courtesy: NDTV.com


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