The Central Statistical Office (CSO) has once again served us startling GDP numbers, which make it seem that the economy galloped with great vigor in FY16. It almost hit its potential in the March quarter at 7.9%. That suggests the phase of cyclical recovery is over; it is now time for consolidation. The amazing revival has defied naysayers: Where was the need for big-bang reforms or a deep policy rate cut? Why bother about external markets and bat for a weaker currency when domestic demand is so robust? Why worry about rural demand when discretionary spending keeps urban India busy? Why at all should drought matter, if wheat and horticulture flower with very little water? And if the economy can be lifted up with just half-a-cylinder, why have four?
Unease persists, yet. No more do analysts refrain from raising doubts. Many are uncomfortable about the methodology and data for net indirect taxes’ estimation, which blows up GDP at market prices. Some are convinced an underestimated GDP deflator is masking real growth; others question the wisdom in using WPI instead of CPI to deflate weighty services like trade and finance; still others suggest double deflation method might be better for estimating value addition in manufacturing. Another segment continues its discomfort with the MCA21 database and how the sample is scaled up. High discrepancies of the demand-side GDP estimates cause misgivings about scale and direction of future revisions too. Growth estimates alas, have turned into a binary choice—either you believe them and blow the trumpet or do-your-own national accounts and move on.
What about the recovery though? There is a strange consensus—most analysts agree there’s a “slow and gradual recovery”, a description seen many times in RBI’s monetary policy reports too. Wherever one might be on the growth scale, a recovery is seen for sure. Economists are carrying this burden of proof for past several quarters, anxiously scanning the earth, and seeing green shoots sprout if any indicator moves up. Downward slides, for the most, are explained with touching optimism; if one pointer falters, another whose needle is moving up has often replaced to support the idea of ‘recovery’. In short, rising markers have been ‘green shoots’, the torch has moved across a gamut of indicators, an upturn imminent for quite a while. The trend in most leading indicators, however, is that improvements do not last—expansions for a few months are generally accompanied by matching falters. A look at some signal indicators shows why regular claims of economic progress have still not materialised into a confirmed recovery.
Start with the IIP, whose pick-up has rarely endured beyond a few months after which it has run out of steam. In some months, its ascent has been statistically exaggerated. Nonetheless, this ‘stop-start-stop’ hasn’t held back ringing recovery bells whenever the IIP got a heave-ho; periodic tail-offs have patiently been ascribed to floods and other such or considered paybacks or consolidation. A secular trend, backed by pointers elsewhere, has been missing. But this hasn’t deterred ‘green shoot-watching’ or inferences of a round-the-corner-upturn. What has up-swinging industrial output historically looked like?
The steady downward drift of bank credit growth, a long-time close correlate of Indian economic activity of which it is the major financier, never dampened the passionate sighting of green shoots. Like the IIP, intermittent growth spurts were reckoned as activity ‘pick-ups’. Soothing explanations for the weakness ranged from ‘shift in borrower-preferences’ to non-bank funds, focus on real against nominal growth due to the enormity in price shifts, while the fact that even the feeble uptick is retail-loan driven hasn’t deterred defense. The most recent acceleration, of the past two quarters, was a ‘green shoot’ too, portending a cyclical recovery. Truth or self-delusion, but inflation-adjusted credit growth trend is flat; it was lower in FY16. Quite matching IIP movements, supported by dwindling rates of capacity utilisation in manufacturing each passing year, and, again, significantly deviating from past behavior during a recovery, e.g. FY04.
An occasional rebound in imports (non-gold, non-oil) growth merited a green shoot card too. Its secular flatness, or the unsustained uptick (the 2014 bounce is off a negative base) hasn’t affected recovery predictions. Observe once more the difference from past trend when the economic cycle has turned. Similar false dawns are seen in the occasional slowing of export deceleration, as even it currently is. The graph illustrates the repeated, unsustained pattern of even tiny uplifts as also export growth behaviour in past recoveries.
Why are secular trends missed or brushed aside, pluses and minuses not balanced in this elusive search? Do bad assets reduce or mount in a recovering economy? Leading or lagging, what is the direction of asset quality? The latest official update is awaited, but gross and net NPAs surely jumped in the two quarters from September 2015.
Consider the key macro indicators for March, April and May—the PMI, industrial output, imports (capital and consumption goods), credit growth, inflation, number of stalled or under-implementation projects, banks’ performance, and so on. Most have fallen back or remained weak. The green shoot now is corporate results, where revenues and profits rebounded. Caution is elicited here because growth is from a low base, says Mint’s Macro Chartfest (June 2)—sales growth was in March 2015, and profits fell 75% for the 2,125 firm-sample; the margin boost from low input costs is wearing off too. Green shoots are also seen in motorbike sales (those of cars has wavered), medium and heavy commercial vehicles sales (here, fleet replacement by large operators is the key driver), cement (there’s a base year boost and an average 55% capacities’ use), road cargo pick-up (that of rail is falling as freight charges increased), increase in air passengers (less are taking trains where fares have zoomed), and so on.
The elusive search for green shoots has been immensely supported by the oil price crash in late-2014, which raised real incomes somewhat, prompted consumer spending and supported producer margins. But production and other demand indicators have been dropping off? Is there indication that terms of trade benefits are tapering off? Lead indicators ‘then’ (FY04 recovery) and ‘now’ are amazingly different: The slightest of upticks is failing to endure. The pointer seems to be that whatever growth is got largely from the deflator, ‘real’ recovery is subdued.
The author is a Delhi-based economist