It is not often that news about revision of GDP data pertaining to years gone by attracts more attention and comment than new GDP data, but that was what happened recently.
The controversy accompanying the release of the calculations of the GDP back series for the years 2005-12 by Niti Aayog Vice Chairman Rajiv Kumar and India's chief statistician Pravin Srivastava on November 28 was so heated that the announcement of the second quarter GDP data for the fiscal by the Central Statistics Office (CSO) just two days later failed to get much attention except from professional economists.
But historical data, though interesting, is hardly as important as the current state of the economy. And the fall of the GDP growth from 8.2 per cent in the first quarter to 7.1 per cent in the current one was worthy of attention. Some fall was expected - after all, the 8.2 per cent was impossible to repeat this quarter because of the base effect - but perhaps not quite as much as the CSO estimates showed.
"GDP growth for the second quarter at 7.1 per cent seems disappointing," Subhash Chandra Garg, Secretary, Department of Economic Affairs, Ministry of Finance, admitted shortly after the CSO released the statistic on November 30, though he quickly went on to say that things were not that bad. Manufacturing and agriculture were holding steady, he pointed out, while others had been probably affected because of seasonal factors.
Senior finance ministry officials point out that India remains the fastest growing major economy. Despite that, there was a scramble among economists to revise downwards their growth projections for the whole year. Most of the rating agencies such as CRISIL, CARE and Fitch revised their GDP growth expectations for the year downwards, while others such as SBI chief economist Soumya Kanti Ghosh and HDFC Bank chief economist Abheek Barua are on a wait and watch mode. The few who did not revise their estimates were those who had given pessimistic expectations - such as ICRA's principal chief economist Aditi Nayar, who had said the GDP growth would touch only 7.2 per cent for the year. "The new normal for the Indian economy is 7 per cent GDP growth and 2018/19 will be a normal year," former finance minister P. Chidambaram said in a Twitter post.
GDP is just a number though and GDP debates tend to interest professional economists and finance ministry mandarins more than common citizens. On that front too, the government's worries are growing. Farmers are becoming increasingly vocal about their income woes; survey after survey is showing that there simply aren't enough jobs being generated for the number of young people joining the workforce every year; small and medium enterprises are crying about credit squeeze, falling profits and cash flow problems; and auto makers are worrying about slowing sales. India could miss the Modi government's overall annual GDP growth target of 7.5 per cent for the year.
Rising distress on the ground
In the last week of November 2018, a week or so before the GDP numbers were released, about 50,000 farmers from all over the country marched to Parliament Street in Delhi, demanding assured fair prices for their crops. A few days earlier, Mumbai, the country's commercial capital, had witnessed a similar agitation. Demands for better prices continue to rise from onion farmers of Maharashtra, sugarcane growers of Karnataka and opium farmers of Rajasthan. Is there a farm crisis? Or are these protests instigated by the political opponents of the ruling BJP as India moves towards yet another general election in 2019? After all, the last two years saw near normal monsoons and things should not be so bad.
The problem for farmers though is that whether there is a good crop or bad, they are simply not getting enough money for their produce. Recent reports suggest that a bumper harvest, in fact, aggravates the situation for many poor farmers. In Maharashtra, for example, a recent report suggested that the average cost of production of one kilo of onions for the farmer is about Rs 10, while he is getting only Rs 1 per kilo when he sells it.
In the wholesale markets, it fetches Rs 10 per kilo again, while the average consumer buys it for Rs 20. Low food price inflation, says one expert, is actually a double edged sword. It might seem good for the government but it is an indicator that the farmer is not making adequate money. The ambitious minimum support price (MSP) scheme announced by the Narendra Modi government is not helping, says Avik Saha, organising secretary of All India Kisan Sangharsh Coordination Committee, which organised the Delhi march in November. He adds that in most cases, there simply aren't any takers willing to pay the MSP to farmers.
If rising farm distress is not bad enough, the government's worries are accentuated by the acute shortage of jobs being created to meet the needs of the 10-12 million youth joining the workforce every year. While the government discontinued its old employment measurement survey and has instituted a new one - the results of which are expected any time now - there are plenty of other surveys as well as signs on the ground showing how acute the problem is. Centre for Monitoring of Indian Economy (CMIE) chief Mahesh Vyas has been flagging the unemployment problem for some time now. Vyas does a rigorous household survey, which also captures the state of employment and employment seekers in the household, and his data has been pointing to a worsening situation for some time now, in fact, since demonetisation.
Says Vyas: "Labour market metrics improved a tad in November 2018 compared to October 2018, but remains dismal." He states the improvement was concentrated in rural areas while urban areas saw a deterioration in CMIE's labour market metrics. "Labour participation rate and employment rate in urban India are at their lowest levels since January 2016 when we started measuring these. Further, the slight improvement in November notwithstanding, the unemployment rate has been rising steadily since July 2017," he says.
The desperation of those entering the job market makes news from time to time. Recently, in response to an advertisement for job openings for a few hundred peons in Uttar Pradesh, over 93,000 people applied, including doctorates and post graduates when the minimum qualification was for a class 5 pass out. A bit earlier, an advertisement for 100,000 low paid jobs in the Indian Railways attracted 20 million applicants, while in Rajasthan, post graduates, engineers, lawyers and chartered accountants lined up for a few job vacancies for peons.
A report by the Azim Premji University's Centre for Sustainable Employment gave an explanation for the distressing jobs situation. It pointed out that the government's biggest challenge was to translate high GDP growth to commensurate new jobs. The problem, it says, is that 10 per cent GDP growth is leading to the addition of just 1 per cent new jobs.
Crisis of confidence
The government's worries are growing on other fronts too. A crisis of confidence seems to have gripped consumers as well as the corporate world. The Reserve Bank of India's Current Situation Index shows how consumers feel about the current economic situation: it showed a dip in the November round, compared to September. When the Modi government had taken charge four years ago, consumer confidence had soared.
Business Confidence Index has also been down for some time. Two such surveys - one by Business Today and another by the RBI in November 2018 - showed that businessmen were not particularly optimistic about the medium-term future. Only one survey showed business confidence rising. However, even fairly optimistic corporate chieftains are adopting a wait and watch attitude towards new projects. While they are happy snapping up good quality distressed assets at bargain basement prices during bankruptcy proceedings, they are not that bullish about new greenfield plants. Latest data from CMIE shows that the value of new projects declined sharply for the second straight quarter (July-September).
The housing market had been in the doldrums after the November 2016 demonetisation, and the problem was made worse by over-supply of units and delays in projects by builders. But now the slowdown in sales is affecting other sectors as well. Automobiles is one of them. It has been seeing a market slowdown since last year and even the festive season has not helped auto makers. Maruti, which has over 50 per cent share in India's auto market, complains the slowdown is affecting even its best sellers. Kenichi Ayukawa, Managing Director and CEO, Maruti Suzuki India, says, "Globally, the economy is not doing very well and that has impacted India too. Since the year began, oil prices have gone up... In the last few quarters, cost of insurance has also gone up. The financial availability crunch at banks is another issue, in addition to rupee depreciation. With volatile stock markets, customers are hesitant about making new purchases."
But Maruti is a big corporation and can ride out a medium-term slowdown. For small and medium enterprises, the problems are far greater. They are caught between cash flow and working capital problems, a squeeze in credit, and rising compliance costs because of GST. The radical new tax, while good for the long-term health of companies and the government, has created short-term issues that have hit MSMEs hard. They are yet to recover from this fully, as an RBI study shows. Anil Bharadwaj, Secretary General of Federation of Indian Micro & Small and Medium Enterprises, said at a BT roundtable that challenges posed by the GST regime is not limited to working capital crunch, but also rising instances of credit default, or increase in NPAs among MSMEs.
A senior government official close to the finance minister points out that while the government is trying its best to help the SMEs through schemes like MUDRA loans and 59-minute loan approval, and also encouraging banks to lend more easily, it is facing resistance from the central bank. "The RBI was too lax earlier with defaulting borrowers but now it has gone the other extreme. It is throttling credit to SMEs in a bid to correct its earlier mistakes," the official says.
The government's problems with the RBI go further. The central bank has persistently refused the government's demands for money from its reserves, which the government wants to recapitalise public sector banks. Out of 27 PSBs, currently as many as 11 are placed under prompt corrective action (PCA), which essentially means they cannot lend unless their capital structures improve. Equally, despite low inflation, the RBI has not lowered interest rates - or at least by as much as the government would like, which the government thinks is holding up some growth. Finally, the central bank has refused to relax the non-performing asset (NPA) norms for the power sector, which is in a mess, and for which the government wants special treatment so that it can be revived.
To add to this, the government needs to deal with four other problems, none of which have easy solutions. One, the rise in crude oil prices a few months ago threatened to throw government finances and current account deficit out of gear. Since then, crude prices have moderated but not as much as the government would like, and the effect on the government's balance sheet is still likely to be higher than budgeted. Second, the rupee volatility has thrown calculations out of gear and made corporations very cautious. It has also affected the current account and trade deficits. Third, revenue collections so far have been less than expected, which is crimping its ability to spend heavily and boost economic growth before elections. Given how much the economy depends on government spending, that is a big dampener. And finally, despite numerous efforts, export growth has been sluggish and more than outstripped by import growth, throwing balance of payments off kilter.
All is not lost
Government officials and even economists agree that things could be turned around, though double-digit growth in the near future may not be happen. Seven per cent-plus growth in the medium term is eminently doable and it could even be nudged up a bit and many of the current problems could be solved with some hard decisions and a bit of luck.
After the second quarter GDP numbers were released in November, Bibek Debroy, Chairman of the Economic Advisory Council to Prime Minister (EAC-PM), said in a statement, "Despite international trade tensions and volatile crude oil prices, India's strong economic fundamentals continue to provide the much needed thrust for it to be a major global driver of economic growth. The robust growth in manufacturing and construction show the growth momentum continues to be broad based."
SBI's chief economic adviser Ghosh, however, believes that urgent measures are needed to boost the agrarian and rural economy. "We believe that the biggest lacuna in the system is lack of systematic approach towards... agricultural marketing. To aid the farmers, the government is currently promoting Farmer Producer Organisations (FPOs) that enable farmers to enhance productivity through efficient, cost-effective and sustainable resource use and realize higher returns for their produce. FPOs are more like collective association of SHGs (self-help groups) and the government can make a beginning with such a model," he notes. Ghosh also maintains that the agriculture sector needs an immediate price intervention and subsequent better price discovery for the farmers. "Agriculture prices continue to remain depressed and it is not clear how the MSP may lift prices in the absence of an effective procurement scheme. The recent procurement scheme launched by the government seems to have made a sedate beginning. Our estimates show that an income support scheme like Telangana (has) may be rolled out in states like Bihar, Assam, Chhattisgarh, Haryana, Punjab, Jharkhand and Uttarakhand, where the cost is not prohibitive."
Indranil Sengupta, Chief Economist, India, Bank of America Merrill Lynch, suggests that solving the liquidity crisis can go a long way in minimising the effects of a slowdown. "The biggest problem we face today is high lending rates," he says. The traditional Indian response to a global slowdown has been to ease rates and spur domestic demand. But in the current slowdown (from 2011 onwards) we've had very high rates, he says. "As a result, we have two problems. One, there is unsatisfied credit demand because often credit demand tends to be higher than the supply, which is why you have high lending rates. Two, you generate NPAs, especially so in the infrastructure sector where gestation is much longer. So from a 2018 perspective, we are facing a liquidity crunch."
In an election year, private sector investments are typically put on hold until clarity on the new government emerges. The outgoing government, on the other hand, tends to spend more in a bid to impress voters. With private consumption growth beginning to stabilise, exports may be the only growth driver that can make a difference in the short term. How much of a difference it can make depends on the enabling factors. External demand seems to be moderate, and competitiveness alone is going to drive the growth push. But can the government ease credit facilities to exporters and how fast can its trade facilitation measures improve?
Financial services firm Edelweiss Securities has advice for investors. "Don't split hairs on India's macro earnings, valuations, etc.", its India Strategy 2019 report states. "Split 2019 into two halves. The first when global macros, noise around election build-up and theatrical interpretations of exit polls will make market and stock calling even more of a mug's game; one should play safe. The second half should be a return to a more optimistic normal - with a more risk-neutral corporate sector and an opportunity to ride a more buoyant, but a long-time-coming business cycle."
The second half should be a smoother ride, Edelweiss concludes. For the markets, perhaps, yes. But for the real economy, it's too early to conclude. Though if crude prices soften further, and the pressure on government finances gets resolved, the economy could once again start improving. All it needs is a bit of luck.