The truth is out, finally.
I began this weekly column in January 2015 with a piece on the state of the Union. I have been saved the trouble of making a year-end assessment. That job has been performed admirably by the economic division of the department of economic affairs, ministry of finance, Government of India. Thank god, we have always allowed them the autonomy and freedom to produce the annual Economic Survey as well as the mid-year Economic Analysis.
The mid-year analysis for 2015-16 presented last week contains a string of confessions and admissions that tell us more about the Narendra Modi government’s performance than all the learned commentaries taken together. Here are some:
UPA years were boom years
“We undertake this analysis for three time periods: the boom years, from 2004-05 to 2011-12, 2014-15 and the first half of 2015-16. The striking finding about this year is that compared to the past, the Indian economy is now powered by private consumption and government investment. This is in sharp contrast to the boom years, when the economy was powered by all four components of demand.”
The admission is that private investment and exports are languishing. It is like a car running on two wheels.
There is another related confession: “In the boom years, exports were adding 1.9 percentage points to demand whereas in 2015-16 export demand has been falling (-1.1 percentage points). Similarly, private investment contributed 3.2 percentage points (in the boom years) and only 1 percentage point in the current year.”
Private sector under stress
For a government that is believed to be pro-business, and had the support of big business and big money, its biggest failure is the moribund state of the private sector.
The analysis confesses, “Why is private investment weak? Corporate balance sheets remain highly stressed… the weighted average interest cover ratio has declined from 2.5 in September 2014 to 2.3 in September 2015… a rise in the indebtedness is reflected in a rise in the debt to EBIDTA ratio from 2.8 to 2.9 over the same period. Profit after tax for the corporate sector as a whole has remained largely flat in FY 2015 vis-a-vis FY 2014. As a result, capital expenditures as a share of GDP have declined further from 5.4 to 5.2 per cent of GDP.”
There are more tell-tale signs. In June-September 2015, net sales of firms fell by 5.3% compared to the same period last year. The manufacturing sector is particularly bleak with net sales down 12%. Non-food credit is growing at 8.3%, the slowest in 20 years. Growth of credit to industry is 4.6% while credit to medium enterprises actually shrunk by 9.1%.
Causes of rural distress
The analysis confesses, “rural wage growth and minimum support price increases—important determinants of inflation—have remained muted”. Both flow out of explicit and deliberate policy decisions of the government. The monsoon has added to the woes of farmers. As the analysis points out, “Latest data for the rabi season suggests that net sown area is lower than for the corresponding period of last year; this combined with the likely adverse productivity effects from four consecutive seasons of weak rainfall create downside risks to agricultural production for this fiscal year.” Correlate these to the number of suicides by farmers that are reported. Such are the consequences of the absence of a coherent policy for the farm sector and will also explain why there is so much rural distress and angst.
Where are the promised jobs?
Where are the jobs is the question uppermost in the minds of most persons and most families. The 26th quarterly employment survey conducted between April and June 2015 showed that job creation in the manufacturing and export-oriented sectors fell by a net of 43,000 from the previous quarter. This is the worst performance in six years. In the same quarter of 2014, these sectors had added 182,000 jobs. The analysis is silent on job creation. The silence itself is a confession.
Fiscal deficit a challenge
The most worrisome confession is that “the decline in nominal GDP growth relative to the budget assumption will pose a challenge for meeting the fiscal deficit target of 3.9% of GDP. Slower-than-anticipated nominal GDP growth (8.2% versus budget estimate of 11.5) will itself raise the deficit target by 0.2% of GDP.”
Nevertheless, I believe that the government will meet the target of 3.9% this year, but what about the next fiscal year? There is an ominous warning: “If the government sticks to the path for fiscal consolidation, that would further detract from demand. On these assumptions, and unless supply-side reforms provide an impetus to growth, real GDP growth next year based on an analysis of likely demand is not likely to be significantly greater than growth this year.”
So, we have been warned.
Achhe din far away
Since nominal GDP growth in the second quarter was only 6%, the estimated nominal GDP growth of 8.2% for FY 2015-16 as a whole is a ‘pie in the sky’. The estimate of real GDP growth for the year at 7-7.5% range safely assumes a much lower point. Wisely, the analysis makes no claim for GDP growth in 2016-17 and there is no boast of achieving 8 per cent plus growth rates!
The Achhe Din bells have fallen silent.