Column: Dont confuse luck with performance

Written by Surjit S Bhalla | Updated: Sep 6 2014, 08:14am hrs
One hundred days, and what do you get For starters, GDP growth during April-June at 5.7 percent was the highest in the last two years. No sooner had the number hit the wires that the BJP leadership started their chanthumne kaha tha, acche din aane wale hain; woh aah gaye (We told you that good days are about to come, and now they are here). The glowing finance minister, Arun Jaitley, went a step further: With the long-term impact of all the initiatives we have taken, I am sure the impact in the coming quarters will be much larger. Why such a robust growth rate The finance ministry press release reported that with improvement witnessed in some important sectors including manufacturing as well as in the performance of exports, along with the measures taken by the government, the economy can be expected to show further improvement in the remaining part of the year. Unfortunately, the long term economic policies initiated in the first 100 days, are, like the invisible hand, nowhere to be seen.

As everyone knows, especially the BJP and the Congress, Indias economy has been in a deep funk for the last two years, so any improvement was likely to be a star event. We also know, and acknowledge (even the losing sides do so) that there has been a major shift in sentiment since the election. And that generally people are quite happy (subject to caveats noted below) with the historical change at the Centre. Add to this the considerable feel good factor regarding PMs foreign policy successes, including, for this author, his refusal to talk with the Pakistanis after they violated the spirit of the foreign-secretary-level talks by meeting with the Hurriyat before. (They had all the time in the world to meet afterwards, so why this in-your-face behavior)

But GDP growth has to do with economics and policy; no economy can run for very long on feel-good sentiment alone. What are the economic policy initiatives that this government has taken since

assuming office, policies that helped propel GDP growth to 5.7% Given the considerable uncertainty surrounding the election (remember hung parliaments), it is doubtful that any investments were made during the first two months of the quarter in question (April and May 2014). And for a one-month tail to swing the quarter to record two-year high Possible, but not likely.

There are two indications that it was pure dumb luck that allowed GDP growth to register a two-year high in the very first quarter of the Modi regime. The first piece of luck was due to the often over-quoted base effect, i.e., the corresponding quarterly figure last year was low, and therefore the bounce-back was above normal. But how low were last years April-June numbers As it turns out, the base was not only low, but very low. As readers of this column know, the ministry of finance (and RBI!) cannot decipher this simple fact because they rely on estimates of year-on-year (yoy) growth; this estimate hides considerably more than it reveals and can lead to grievous errors of interpretation. For example, on a seasonally-adjusted basis, the April-June 2013 quarter was the worst sequential growth quarter on record (since 1996) for manufacturing, construction and overall GDP growth. This sequentially adjusted GDP growth (between January-March 2013 and April-June 2013) was a negative 2.6 %, and this number is not annualised!

But it is possible that the Modi election so electrified business sentiment that GDP growth catapulted in just one month, and that such high growth will continuously be the outcome of the long term initiatives already undertaken by the government. On this, the preliminary data released to date does not bear good news. Core infrastructure growth has declined from 7.2 % yoy in June to only 2.6 % in July. Industrial production growth is expected to decline from 3.4 % in June to close to 0% in July (Oxus forecast). In May, IIP had registered a yoy figure of 5%. In addition, agricultural growth will be considerably muted this year because of the weather and is unlikely to exceed 1%. This means that unless new policy initiatives are undertaken, the Indian economy will continue its sub-par performance for the rest of the fiscal year. And there is every likelihood that the economy will soon show lethargy and sub-5.5% growth unless the much anticipated structural, long-term economic reforms are forthcoming.

If this lacklustre performance becomes reality, the government will have only itself to blame. It is true that an economy cannot turn around easily; but it is also true that there are a lot of low-hanging and rotting-on-the-ground fruits that can easily be plucked. The GST bill can be passed (all that majority and nowhere to go), welfare expenditures cut and reformed, and the government should take considerably firmer policy measures to bring food inflation under control. It has been gifted a declining oil price, but unless food inflation is reduced, RBI will not cut rates. If interest rates are not reduced, weather continues to be a spoilsport, global growth keeps declining, and policy initiatives are postponed at least till February 2015 (and beyond), the arrival of acche din will also be postponed.

My humble suggestion, and plea, is that the time has come for a post-100-day course correction. And the time is now. The social sentiment is already polluted with BJP MPs making all sorts of claims relating to Hindi, Hindu and Hindutva. Enough already. Such actions are transparently seen as a retrograde measure to indoctrinate young minds by catching them young. Further, dont waste your energy, and most importantly goodwill, on stray issues like requiring children to watch Modis Teachers Day speech. There was no requirement to watch Modis brilliant Independence Day speech, yet, we all watched it. Why require feedback forms to be submitted to the state education departments on the number of students who saw the telecast, how much they enjoyed it, etc This is unnecessarily giving Modis critics fodder to justifiably call him authoritarian. Requirements like this are more the mark of North Korea than the worlds largest democracy.

What should Modi do Concentrate on economic policies for growth which is why people voted for him. Modi won the hearts and minds of most Indians by promising them growth and a polity which is modern and free from fundamentalist ideology. The BJP might continue to win elections (just look at the competition) but if present social and lazy economic policies are continued, Modi will lose on his chemistry with the peoplehis biggest asset.

The author is chairman, Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company. Twitter: @surjitbhalla.