The country’s potential growth rate has fallen to 6-6.5%, says Pronab Sen, the country’s former chief statistician. The share of the corporate sector in the Gross Domestic Proudct has gone up quite significantly, at the cost of MSMEs, he notes, and points out that one of the implications of this is a rise in incremental capital output ratio (ICOR), and the conseqnent requirement of a much higher investment rate of 35% of GDP or so, to enable a 7% growth in national income. In an interview with Priyansh Verma, Sen, who is currently chairman of the standing committee on statistics, also highlights the employment shift to agriculture, which bucks a trend that remained for nearly a quarter century.
Blurb: “One of the most sensible things the government did was to have a four-rate GST structure. I don’t think there is any reason to tinker with that structure. For country like India, single GST rate is a bad idea.”
Q. The hope of an new corporate investment has been dented with reports that private capex declined in Q2.
A. No, (the cycle is) not yet happening. Much of the growth in the economy had earlier been driven by the corporate sector, and they could do it because there was a lot of excess capacity in the system. That excess capacity has not been fully used up yet. The capacity utilisation in the manufacturing went up to 76% in Q4 FY23 from 74.3% in Q3, but it would need to go up further. The capex cycle is going to be a little (farther). Also, when the turning point of capex cycles in close to the elections, companies tend to generally defer the actual investments until elections are over.
Q. The potential growth of the economy has fallen. Are we unable to come out of this situation?
A. I would peg the (extant) potential growth between 6-6.5% band, not higher. If you look at the period after demonetisation, the share of corporates in the GDP has gone up quite significantly, but the share of MSMEs has fallen. One of the implications of this is that the incremental capital output ratio (ICOR) has gone up significantly. If the ICOR has gone up, it means investments would have to go up correspondingly. I don’t think we can get back to 7% growth rate, unless the investment rate rise to about 35% of GDP, and we are well short of that at this point.
To achieve 35% investment rate, there must be revival in domestic household savings. Thankfully, the draw-down in savings that occurred during the lockdown has been replenished to a large extent. The framework for increased investments does exist. The corporates are already doing it, although they have slowed down their investments, but the MSMEs are not investing at all.
Q. In Q4 FY23, the higher GDP growth was driven by (positive contribution of) net exports. This year, given exports have contracted sharply, along with imports, how do you think the GDP to be impacted?
A. The net exports is merely an accounting item. Net exports can increase if exports go down and imports go down even more (as happened in Q4FY23). A weakening export coupled with shrinking imports essentially indicates a weakening economy. The worry should be that both exports and imports are are going down, and it doesn’t symbolise a good economic situation.
Q. India’s tax-to-GDP ratio has not improved despite a lot of efforts by the government. Do you think the sharp corporate-tax rate cut in 2019 was premature?
A. The tax-to-GDP ratio can be improved by one of two ways: one, to raise the tax rate and the other is to create a framework where growth goes up. As soon as growth increases, tax collections will go up, quite rapidly.
On the lower corporate tax-rate, I believe the rate was cut too early. Now that it is taken for granted, it’s not proving to be an extra incentive (for companies to invest).
Q. Do you believe the GST slabs should be reduced? Should there be just one slab?
A. The purist will say one slab. But I think, in the context of a country like India, a single rate is a bad idea. I think one of the most sensible things the government did was to have a four-rate structure. I don’t think there is any reason to tinker with that structure because you don’t want to get into a situation where people say that you are favouring the rich and taxing the poor.
Q. How can we capture the state of MSMEs in the data that we collect?
A. Since we don’t get regular data on the MSMEs, the assumption is that there is a fixed relationship between corporate behaviour and MSME behaviour. So, if corporates are growing at some rate, MSMEs are assumed to grow at a similar rate. Under normal circumstances, this is not a bad assumption, but when we have reasons to believe that corporates and MSMEs are not moving in sync, then the assumption (would have to be reviewed). The problem is, we don’t have an alternative. Efforts are being made to get data on MSMEs more frequently, both in terms of the jobs that they are creating and the production data. Given the nature of MSMEs, this kind of data can only be collected through surveys, and they are time-consuming. Therefore, even if you get the data, you won’t get it in time to include it into quarterly estimates. The earliest you will be able to do it, is at the stage of revised estimates.
Q. Why do we see so much volatility in IIP (Index of Industrial Production)?
A. The way the IIP works is that you select a set of companies that are supposed to send their production data. Quite often, it doesn’t happen. In fact, when the initial IIP estimate is put out, there is less than 40% production data coming in. The companies are not meeting their deadlines. As the data comes in, the IIP is revised.
Q. What’s your understanding of the unemployment situation in India?
A. Urban employment is still not high. If you look at the aggregate employment picture, it doesn’t look too bad. But once the data is disaggregated, what you find is essentially that rural employment has gone up, and in the sector rural, it’s agricultural that creates employment. This is reversal of a long trend. We have had almost 20-25-years period, where employment in agriculture diminished year-on-year. This is mainly due to return of migrants, who went back after lockdown. The quality of jobs has clearly deteriorated.