Good to see the FM give it back in equal measure, but it is a good idea to be a bit cautious about the green shoots
If former finance minister P Chidambaram had a dig at Nirmala Sitharaman’s I-don’t-eat-onions remark, the FM got her own back when she said his avocado remark—“does she eat avocados?”—showed just how elitist he was; even better, while comparing the deficits of the UPA with those of the NDA and pointing to the twin balance sheet crisis Chidambaram left behind, she said, “So, that twin balance sheet crisis is not something which I would want to learn from those very competent doctors”. Sitharaman was taking off on Chidambaram’s remark that the economy was in the ICU, and that, as he put it, all the competent doctors the government had appointed—Raghuram Rajan, Urjit Patel, Arvind Panagariya, Arvind Subramanian—had left the country.
It wasn’t just repartee that Sitharaman was indulging in since there is little doubt the UPA left the economy in a real mess. Excessive lending to over-leveraged corporates, and the central bank’s extend-and-pretend schemes, left both India Inc and the banks too broke to invest/lend. And, while the BJP has made some bold reform measures—IBC is the most important one in the context of broke banks and firms—the problem is that is hasn’t been bold enough to undo a lot of the damage of the last 50+ years. Some of the obvious areas that come to mind are the lack of privatisation, close to no movement on labour flexibility, and little progress in actually removing red-tapism, or solving the problems that most large investment sectors like telecom are reeling under.
Given how both economic growth and investment sentiment have plummeted, it is good to know that the FM has been able to shortlist seven ‘green shoots’. These include the rise in IIP and PMI, in GST collections, in FDI and FPI flows, the record Sensex and foreign exchange reserves. While some indicators may suggest a possible turnaround, even if the FM was just scoring political points, it is critical she not believe her own rhetoric. Certainly, the PMI is at a near eight-year high, but the PMI, like the IIP or GDP growth, has risen in the past and then collapsed; the point is that with little consumer demand, and investment sentiment remaining subdued—unutilised capacity levels are around 31%, pushing back the need for investment some more—and exports growing by just 1.2% in the last five years, there is little reason for the PMI to remain elevated for too long. And, the IIP, which was positive in November after three months of contraction is back to contracting in December.
FDI flows are up, but when you look at them as a share of GDP—that’s how domestic investment levels are also looked at—they fell from 3.4% in FY09 to a likely 2.4% in FY20; besides, a large part of this, such as Canadian fund Brookefield’s $6.3 bn last year, is really meant to buy existing assets, so while they are welcome, they don’t really translate to greenfield investments.
The Sensex is mostly artificial given that, while it has risen to 41,566, the number of firms with a market-cap of more than Rs 1,000 crore fell from 853 in December 2017 to 684 in December 2019; and, while the rise in GST collections is welcome, this may have more to do with the administrative tightening the government has been doing than a growth in output. Indeed, even if there is a genuine increase in economic activity, keep in mind that with the banks’ NPA problem still far from peaking and banks too scared to lend, credit grew by a mere 1.2% in the April-December period this year (it was 6.2% in the same period last year); how can GDP grow if credit growth is so slow? It is precisely because the measures announced so far aren’t enough to tackle the problem that RBI just announced some forbearance in recognition of bad loans. That is why, most analysts are looking at a slow revival in the economy for at least another year.