Not long after Union Minister of IT & Communications (and Law & Justice), Ravi Shankar’s declaration that India is a sound economy because of three movies making Rs. 120 crore in a single day, the World Bank on Sunday slashed the country’s growth forecast for India’s current fiscal year to 6 percent. It warned that the ‘severe slowdown’ could further weaken the country’s already unsteady financial sector.

Yet, top Indian leaders seem to float in their own world of magical realism. Prasad not only made flippant statements about the economy being “sound” due to high movie ticket collections, but also junked his own government’s report about India’s 45-year high unemployment rate, calling it incomprehensive.

In a similar vein, not too long ago, Finance Minister Nirmala Sitharaman had blamed the “mindset of millennials” for the declining car sales saying they preferred hailing private taxis or use the metro to commute to work instead of committing to Easy Monthly Installments (EMIs) for buying their own vehicle.

This could be an article of a long list of similar goof-ups! Minister for Railways, Piyush Goyal, a trained chartered accountant himself, said that the people shouldn’t “do maths” about the economic slowdown as maths never helped Einstein discover gravity. After an uproar on Twitter, with erudite users of the social media micro blogging site reminding him that it was Newton, not Einstein who made that discovery, he apologized.

The cherry on the cake came by Rashtriya Swayamsevak Sangh (RSS) chief Mohan Bhagwat who said that if people simply stopped talking about the slowdown, the economic activity would pick up.

What the World Bank Said
In 2018-19, the growth rate stood at 6.9 percent.  However, in its latest edition of the South Asia Economic Focus, the bank said that the country was expected to gradually recover to 6.9 percent in 2021 and 7.2 percent in 2022.

Findings of the report show that strong domestic demand, which propped high growth in the past, has weakened, driving a slowdown across the region. With private consumption growing 3.1 percent in the last quarter from 7.3 percent a year ago, while manufacturing growth plummeted to below 1 percent in the second quarter of 2019 compared to over 10 percent a year ago domestic demand in India has slipped.

Private consumption though growing, had slowed down in the second quarter, one reason being the contraction of car sales due to high insurance premiums, new emission norms and uncertainty in GST cuts among other issues. The contraction of NBFC funding which financed 40 percent of car sales, has also contributed to the consumption slowdown.

The World Bank also noted that the widening of the current account deficit to 2.1 percent in 2018-19 from 1.8 percent last year reflected a deteriorating trade balance.

According to the report, the deceleration in growth demands decisive policy actions, and officials say that the initial government steps – easing cycle and stimulus package, point out in the right direction.

Poverty has continued to decline, although at a slower pace than earlier, mentioned the World Bank. Disruptions brought on by implementation of GST and demonetization, combined with a high youth unemployment rate and stress on the rural economy, may have increased the risk for the poorest households said the report.

The report said that India will have to restore the health of the financial sector through reforms in the governance of public sector banks and strengthening of the regulatory framework for NBFCs, while containing fiscal slippages.

The World Bank, from its estimates, expects the South Asian economy to grow lower by 1.1 percent at 5.9 percent this year. In its study, it has also cut growth forecasts for Maldives, Sri Lanka and Bhutan, while raising those for Bangladesh and Nepal.
 
Related
Core sector Growth declines to 45-month low of 0.5% in August: Coal, Crude oil, Cement worst hit
How the Indian Economy should be revived
Economic Slump: Modi Govt Re-Arranging Furniture When House is on Fire
 

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India is currently witnessing a four-decade high in its unemployment rate. This, combined with a virtually stagnant industrial growth rate, a fairly low GDP growth rate, and various other factors clearly indicate that the Indian economy is undergoing a major crisis. Politicians and leaders, however, would have you believe otherwise. In this interview, eminent economist Prabhat Patnaik and NewsClick’s Editor-in-Chief Prabir Purkayastha discuss the state of the Indian economy today and the many factors that are contributing to its downfall.

Courtesy: News Click

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Even as sticking to his original argument that India’s gross domestic product (GDP) since 2011-12 has been overestimated by 2.5%, renowned economist Arvind Subramanian has said in a fresh paper that his estimate of post-2011-12 growth rate at around 4.5% is surely not “implausibly low”, as some of his critics have been arguing following his controversial June paper.

Replying to his critics (he doesn’t name his critics), who include the Prime Minister’s Office, Subramanian states in his new paper, “Prominent commentators have argued that the growth over-estimation cannot be large… They have argued along the following lines: ‘4.5% growth is a disaster. India’s economy is not a disaster. Ergo, India cannot have grown at 4.5%’.”

According to Subramanian, who resigned as chief economic adviser of the Narendra Modi government in June 2018, the critics’ argument is based on several “cognitive benchmarks”, one of them being, “How can India be growing at pre-1980 levels (dubbed as ‘Hindu rate of growth’), when the economy three decades ago was in much worse shape?”
Currently with the Center for International Development at Harvard University, Subramanian says, the critics’ view is that “4.5% growth is difficult to accept” because “it harks back to the pre-1980s era of the ‘Hindu rate of growth’.” They wonder, “How can the Indian economy today, with all the changes that have happened, be comparable to that old performance?”

He replies, “The answer is that it is not comparable, for several reasons. To begin with, today’s 4.5% translates into a per capita growth rate of about 3%. In the pre-1980s era, the GDP growth rate was about 3-3.5% and the population growth rate was 2%, yielding a per capita growth rate of 1-1.5%. So, today’s 4.5% represents more than a doubling of the old ‘Hindu’ per capita growth rate.”

Insisting that 4.5% rate of growth is “impressive” because “today’s GDP level is five times what it was in the 1980s”, Subramanian says, “The 1.5% growth was achieved at a per capita GDP of US$1000, meaning that the annual increments in income were very small in dollar terms. Today’s 3% per capita implies annual increases in income that are ten times larger.”

“Most impressively”, the economist continues, is that “a 4.5% growth rate is a notable achievement in the current, post-Global Financial Crisis world. In fact, if we take all the large major economies of the world, say those with GDP greater than $1 trillion dollars (there are 13 of them), India, at 4.5% real GDP growth, would be the second-fastest growing economy in the 2012-2016 period, just as it was in the 10 years preceding.”

He adds, “Indeed, India’s 4.5% is well ahead of the third fastest growing economy, Korea which grew at 2.9%. And it may well be that even at 4.5% India is the fastest growing large economy if account is taken of China’s growth mis-measurement.”

No doubt, Subramanian underlines, “To be sure, a pace of 4.5% GDP growth for India would represent some under-performance.” However, he adds, even if other countries “have been growing rapidly such as Bangladesh, Vietnam etc. it is far from being a disaster.”

At the same time, the new paper titled “Validating India’s GDP Growth Estimates”, presented at the India Policy Forum (IPF) organized by the National Council of Applied Economic Research (NCAER) in New Delhi on July 10, 2019, argues that it was during 2002-2011 that “India behaved like a typical fast-growing country, with measured GDP growth exhibiting a strong correlation with other demand indicators.”

During that period, he says, “GDP was growing at about 7.5%, while investment and exports were growing more rapidly, at 13% and 15% respectively, in line with the median value of 12% for both variables in comparable fast- growers.”
 

However, post-2011, Subramanian asserts, “The Indian economy was hit by a series of shocks”. The first was the “export collapse”: “During the 2000s, emerging markets were buoyed by strong global demand for their products, which enabled their exports to grow rapidly on average. Since 2011, however, global demand has decelerated, causing emerging market export growth to collapse.”
 

 

According to him, “In India, export growth fell to just 3% from an average of 15% per year in the pre-2011 period. Since India’s export-GDP ratio during the period 2012-16 was about 22%, this shock had the potential to reduce growth substantially.”

The second was what he calls the “Twin Balance Sheet (TBS) problem”: “During the boom of the mid-2000s many companies invested heavily in projects that did not work out, leading to considerable stress in the corporate sector and double-digit levels of nonperforming assets in the banks. As a result, many firms have been not been financially strong enough to invest, while banks have been reluctant to lend to even to healthy firms.”

“In India”, he notes, “Real credit growth slowed to 6% from 14% pre-2011. More importantly from an investment perspective, real credit growth to industry slowed to a paltry 1% from a torrid 15%.” He adds, “Unsurprising that investment growth declined by 10 percentage points, which could knock off another 2½ to 3 percentage points in growth.”
According to Subramanian, while declining oil prices and a consequent improvement in the terms of trade for India as a net oil importer did boost growth by about 1 to 1.5 percentage points, there were other shocks, too which “affected” some of the years since 2011.

According to him, it all began under UPA-2 (2012-2013), when there was loss of macro-stability, characterized by “rising macro-economic distress, corruption scandals, and paralysis in decision-making, leading to the balance of payments near-crisis of July/August 2013.”

Then, during 2014-15, the “agricultural sector was struck by drought for two consecutive years”, and “the growth in food grain production in these years were -4.9% and 0.5%, well below the long run average of roughly 3%. This exerted a downward drag on growth, amounting to roughly 0.4%.”

Finally the demonetisation (2016) was a “large macro-economic shock, when currency supply was reduced by 86% in November 2016, affecting output in the large informal sector, which relies heavily on cash.”

These shocks, believe Subramanian, “took on the key macro-demand indicators”. Thus, growth in:

• Real credit to industry collapsed, falling from 16% to -1%, mirrored in the official figures for real investment growth, which declined from 13% to 3%; 
• Real exports fell from 15% to 3%;
• Overall real credit slowed from 13% to 3%; and 
• Real imports slowed from 17% to minus 1%.

First published on CounterView

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Such human development disparities led Amitabh Kant, CEO of Niti Aayog, the government think tank, to call for an improvement in living standards to raise India’s Human Development Index (HDI) ranking, which has fallen three ranks over 10 years.
 
While some parts of the country are improving, there is “complete backwardness in the other parts. If this continues then India cannot grow for a long period of time”, said Kant while addressing a session on the development of Aspirational Districts by Central Public Sector Enterprises (CPSEs) in Delhi on July 23, 2018.
 
“Unless we don’t improve in key areas, the pace of growth in some of these states will be very slow,” he said, according to this NDTV news report.
 
An IndiaSpend analysis of the most recent development indicators data shows the rate of development varies widely across states in India, building a picture of an unequal nation.
 
While the gross state domestic product (GSDP) data are equivalent to entire developed nations (e.g. Maharashtra and Finland), others are more than 84 times smaller. Similarly, states such as Gujarat have primary school dropout ratios significantly below the national average (0.83 vs 4.34), while others are more than five times higher (Assam’s is 15.46).
 
India currently ranks 131 out of 188 countries on the HDI, lowest amongst BRICS nations in the most recent 2016 rankings.
 
The HDI measures key dimensions in human development: a long and healthy life, being knowledgeable and having a decent standard of living. The index can be used to question national policy choices and assess how countries with similar gross national incomes per capita can end up with different human development outcomes.
 
Infant mortality rates highlight healthcare inequality
 
The rate of children dying before reaching their first birthday is more than fives times higher in states such as Madhya Pradesh (54), Assam (54) and Odisha (51), compared with the best-performing states of Goa (9), Manipur (10) and Kerala (12).
 
As we said, this means some parts of India (Goa and Kerala) are attaining average infant mortality rate (IMR) that are the same as European nations, while the states with the highest IMR equal those of significantly less developed, often disaster/war-stricken and unstable countries.

 
 
While India has reduced IMR, deaths per 1,000 live births, by 68% over 41 years — from 130 in 1975 to 41 in 2015-16 — according to National Family Health Survey 2015-16 data, India’s IMR is still worse than poorer neighbours Bangladesh (31) and Nepal (29), and the African nation of Rwanda (31), IndiaSpend reported in March 2017.
 
IMR is seen as a useful measure of general population health, health systems and programmes. It reflects the influence of a population’s economic development, general living conditions, social well being, rates of illness, and the quality of environment on the causes of infant mortality.
 
The wide discrepancy in IMR between states in India indicates a high level of disparity between access to healthcare, sanitation levels and education of women — all factors shown to have an impact on the survival rates of infants, IndiaSpend reported in March 2018.
 
Economic disparity
 
Maharashtra, India’s economic powerhouse and home to 112 million residents at the time of the 2011 census, has a GSDP of $243 billion per year (Rs 16.5 lakh crore), according to RBI data, equivalent to Finland ($251 billion), home to 5.5 million people.
 
Maharashtra’s GSDP is 5.5 times higher than Bihar, which has a population of 104 million and a GSDP of $44 billion per year (Rs 3 lakh crore), smaller than the North African country of Libya ($50.9 billion), home to 6.2 million.
 
While state GSDP rankings do not mirror those of infant mortality rates shown above, levels of discrepancy are equally high within this economic indicator. The top five states (Maharashtra, Uttar Pradesh, Gujarat, Karnataka and Tamil Nadu) have, on average, 84 times higher GSDP levels than the lowest five states (Manipur, Nagaland, Mizoram, Sikkim, A & N Islands), according to RBI data.
 
As much as 73% of the wealth generated in India last year went to the richest 1%, an increase of Rs 20.9 lakh crore from the previous year and equivalent to the total budget of Central Government in 2017-18, according to a 2018 Oxfam report.
 
Between 1980 and 2014, India had the largest gap of all countries between the growth of the top 1% of the population by income and growth of the full population, according to this 2017 working paper.
 
Education attainment varies across the country
 
The ratio of pupils dropping out in primary school varies widely across the country, from a peak dropout ratio of 15.46 in Assam, to a low of 0.65 in Himachal Pradesh.
 
The states with the highest drop out ratios (Assam (15.46), Mizoram (10.1), Manipur (9.66) and Meghalaya (9.55) ) are found overwhelmingly in the North-East of the country, an area experiencing rapid growth, alongside some of the highest levels of poverty and unemployment, although some of these states (Sikkim and Mizoram) boast some of India’s best health indicators.
 
India’s wealthier states tend to have the lowest levels of students dropping out, such as Karnataka (2.02), Maharashtra (1.26) and Gujarat (0.83).  
 

Source: DISE, School Education In India 2015-16
 
Poverty is one of the main determinants of school dropout, making a state’s dropout ratio a good measure of its population’s general economic and social health, according to this 2012 paper in the International Journal of Social Sciences. The hidden and upfront costs of schooling (books, uniform, travel and fees etc.) and pressure on family members to contribute to household income often force parents to pull students out of school.
 
While primary enrollment ratios have improved and more children than ever before are enrolled in secondary schools, India’s education system is failing to adequately teach students what they should be learning, according to an ongoing study by the University of Oxford, IndiaSpend reported on September 20, 1017.
 
Poverty line
 
Uttar Pradesh and Bihar, states with low levels of annual per capita income ($643 or Rs 43,861 and $460 or Rs 31,380 in 2014-15), have the largest number of people living below the poverty line with 29% and 34% of the population earning below the required amount to meet minimum living conditions; 59.8 million and 35.8 million, respectively.
 
Despite having higher GSDP, Madhya Pradesh, Punjab and Maharashtra follow with a large population (23.4 million, 23.2 million and 19.7 million, respectively) living at minimum income levels.
 
Poverty line indicators are relative to each country and vary according to the monetary threshold of each country, decided as the minimum needed to achieve basic living standards.  
 
India had the largest number of people living under the international $1.90 a day poverty line in 2016, according to this World Bank report. This figure is more than 2.5 times as many as Nigeria, which has the second-largest population (86 million) of the poor worldwide.
 

(Sanghera, a graduate of King’s College, London, is an intern with IndiaSpend.)

Courtesy: India Spend
 

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The report said even though an objective assessment of the demonetisation exercise on output growth is a difficult one now, it expects GDP growth to be decisively lower than 6 per cent in the third quarter and in the fourth quarter, it could only make a gradual comeback, it said.

The report estimates GDP growth for the second half and for the full year at 6.3 per cent and 6.7 per cent, respectively with a downward bias.

“Our assessment of a 6.7 per cent GDP growth (in FY17) with a downward bias is based on the premise that the liquidity shock has led to a drastic consumer spending shock,” an SBI Research’s Ecowrap report said.

It said even as RBI has replaced around 44 per cent of the banned currency, the money is not coming back decisively into the financial system as people are averse to spending.

“This, in turn, is leading to a vicious cycle of banks being unable to replenish cash thereby precipitating the shock.”

Earlier in the day, the CSO pegged GDP growth at 7.1 per cent, from 7.6 per cent in 2015-16, mainly due to slump in manufacturing, mining and construction sectors. However, the data did not factor in ‘volatile’ post-demonetisation figures.

The report said the service sector growth rate is indeed having a significant downward bias. It said sectors like construction, real estate, cement and FMCG are likely to witness a double-digit decline in sales in the third quarter.

The possible solace could be that the companies in the construction sector with a high share of government orders are likely to be less impacted, it said.

“On the whole, the upside to a lower than anticipated GDP estimate in the current financial year will give the government a first mover advantage in terms of a higher than normal trend nominal GDP in the financial year 2017-18.”

This may allow an absolute expansion in fiscal deficit numbers for the financial year 2017-18, without harming the fiscal deficit ratio in totality, it added.

Courtesy: Janta Ka Reporter
 

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Economic output in the current quarter may get affected, with the government’s demonetisation drive temporarily hitting commercial activities in some sectors, Commerce and Industry Minister Nirmala Sitharaman conceded on Wednesday, November 23. This is probably the first acknowledgement by a Union Minister of the negative fallout of demonetisation on the GDP — although Sitharaman was quick to add that it would not last long, according to Hindu’s Businessline.

But the economy will expand subsequently as the Reserve Bank of India is releasing more cash now and banks have greater supply, the Minister added. She also a said that steps being taken to address rural woes; short-term loss to economy could be at least ₹12 lakh crore, says NIPFP report
 “It is only the first week or ten days (following the demonetisation announcement) when there was (a) real hard demand for lower denomination or for ₹500 notes, which gradually came into the market. That week, commercial transactions would have taken an impact. But I think revival will happen. This quarter, there may be an impact on the outflow. It will protract after that,” Sitharaman said.

The government withdrew ₹500 and ₹1,000 notes as legal tender from November 8 in an effort to flush out black money, and began replacing them with new ₹500 and ₹2,000 notes. A full replacement, however, will take some time; this has resulted in a cash crunch.

A ‘body blow’ to industry

Others, however, see a rather more grim impact from the government’s move. The sudden demonetisation drive has served a “body-blow” to the entire industrial sector, and the worst hit will be small and medium enterprises (SMEs), said Biswajit Dhar, Professor, Jawaharlal Nehru University (JNU).

“It is very clear that the impact of the demonetisation drive on demand had not been thought out by the government. It is difficult to assess the extent to which GDP will be hit and the duration, but definitely SMEs will be hit the most, and will take a while to recover from the dip,” he said.
Warning that a massive supply constraint was on the cards, Dhar said this would be a double whammy for exporters, who are already facing demand constraints.

The short-term loss to the economy could be at least ₹12 lakh crore or 8 per cent of GDP, according to R Kavita Rao from the New Delhi-based think-tank National Institute of Public Finance and Policy.

“If ₹3 lakh crore is being extinguished, as is often quoted in media reports, and, say, half of it is used for transactions, the corresponding GDP loss to the economy would be ₹12 lakh crore since, currently, GDP is about eight times the currency in circulation,. This will amount to about 8 per cent of GDP when compared to GDP for 2015-16,” Rao said in a post on the NIPFP website.

Sitharaman also pointed out that the government was taking steps specifically to address the problems of people in rural areas.

“After having heard a lot about agriculture workers and rural areas not receiving as much cash as they would want, the Finance Ministry yesterday reviewed the situation… I am given to believe that in the rural areas, there will be more cash flowing,” Sitharaman said.
 

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