Reviewing the fascinating book Progress by Swedish economic historian Johan Norberg, the Economist recently wrote, “People are predisposed to think that things are worse than they are, and they overestimate the likelihood of calamity. This is because they rely not on data, but on how easy it is to recall an example. And bad things are more memorable.”
These words aptly summarise the nature of the recent debate on growth in India. During 2014-15 to 2016-17, the real gross domestic product (GDP) at market prices grew 7.5% on average. This growth came on the heels of below-6% average growth during the last two years under the United Progressive Alliance (UPA) government.
However, when the Central Statistics Office (CSO) first released its estimate of robust 7.4% growth in 2014-15, most commentators including many of our leading economists rejected it arguing that it did not match their own assessment of reality on the ground. The common refrain was that the economy did not “feel” like it was growing at such a high rate.
Citing collapsing corporate profits and investments as evidence, these critics concluded that the new CSO methodology, on which its estimate was based, was flawed. It did not matter that chief statistician TCA Ananth satisfactorily countered every single methodological criticism or that the claims of collapsing corporate profits and investments were based not on hard data but anecdotes.
So the million dollar question is what do concrete data tell us? Collection of data on corporate savings, which represent corporate profits, and corporate investment lags by a year. Therefore, as of now, 2015-16 is the latest full year for which we have these data.
Corporate savings averaged 11.8% of GDP during 2014-15 and 2015-16. In contrast, between 2003-04 and 2011-12, when the economy grew 8.3% on average, corporate savings averaged a paltry 7.4%. Indeed, corporate savings during each of 2014-15 and 2015-16 have exceeded those in every single year between 2003-04 and 2011-12 by wide margin.
To be sure, legacy sectors such as construction, steel and power have been in distress. But thriving sectors such as auto, auto parts, two wheelers, pharmaceuticals and information technology have more than made up for their poor performance. Unfortunately, consistent with human psychology, negative examples have overshadowed positive ones as also hard data.
What about corporate investment as a proportion of GDP? This figure averaged 12.95% during 2014-15 and 2015-16 and compares with 12.4% on average between 2003-04 and 2011-12. Thus, any claims that corporate investment was out of line with GDP growth estimates too fail to withstand scrutiny.
The average gross capital formation (GCF) as a proportion of GDP, at 31.9% during 2014-15 and 2015-16, has been below the figure of 34.6% during 2003-04 to 2011-12. But it surely does not represent a “collapse” and is well within the range necessary to produce 7.5-8% growth. Indeed, we achieved 8.1% growth in 2003-04 with GCF at just 26.1% of GDP.
CSO growth estimates during the latest two quarters ending on June 30, 2017, have fallen to 6.1% and 5.7%, respectively. Interestingly, this fall has realigned the estimates with the “feelings” of the critics. Consequently, though CSO methodology has remained unchanged, the latter have accepted the estimates without complaint and are now issuing warnings of impending doom relying on them.
While the government must be vigilant to the decline in growth rate, as it demonstrably is, it should avoid overreacting to it. Any claims of fundamental weakness in the economy are so far unsupported by data.
We lack data on savings and investment for 2016-17 but this is no reason to assume that they have dramatically deteriorated. On the other hand, the decline in the growth rate during the last two quarters may well be explained by the massive restructuring of the economy expected in response to recent reforms, most notably, demonetisation, the Goods and Services Tax and cleaning up of non-performing assets (NPAs).
The government must especially resist the temptation to go on a spending spree pre-emptively. It has taken three years of determined effort to achieve fiscal consolidation. This achievement cannot be sacrificed without compelling evidence justifying it.
Known sources of weakness in the economy are two: twin balance sheet problem and poor performance of merchandise exports. The Reserve Bank of India (RBI) is already tackling the former and the government may consider complementing that effort with accelerated recapitalisation of banks. That will be money well spent.
As regards merchandise exports, even excluding petroleum and petroleum products, they have fallen from $281 billion in 2012 to $229 billion in 2016. This is in sharp contrast to years 2003 to 2011 when merchandise exports expanded manifold. Declining exports alongside rising GDP is a rare occurrence.
The immediate feasible actions in this area lie in the domain of RBI. The rupee has seen a massive real appreciation in recent years and this needs to be reversed at least partially. Possible instruments include accelerated accumulation of reserves; no further relaxation of the ceiling on foreign investment in debt, which has heavily dominated portfolio inflows recently; and cutting the interest rate.
In the longer run, the government must do its part by rationalising and lowering the tariffs; taking further actions on trade facilitation; and creating coastal employment zones. These measures would not only help exports but also create gainful employment opportunities.
DISCLAIMER : Views expressed above are the author’s own.