India’s economic growth has slumped to a three-year low in the Q1 2017-18. Demonitisation as well as the badly-implemented GST had a disastrous effect on the economy. The government says the economy is going through a phase of readjustment to a system of formalization, but the consumer sentiments have slipped into a pessimistic zone.
India is witnessing an economic upheaval. There is hardly ever a month when we don’t have changes in the economic and legal spheres leading to disruption and a new course of direction. As a result, the major segments of the economy have been severely hit. According to the latest figures, India’s Gross Domestic Product (GDP) growth has slumped to a three-year low of 5.7% in the first quarter 2017-18. With the change at the centre in 2014, came the change in the course of economy which has gone wayward, given the indicators in the last six quarters.
When the UPA2 made way for the BJP to take over after their electoral victory, the economy was in a mess, but it was steadily recovering and the businesses were optimistic, more because of the new promises and expectations. But, three years down the line, the present government’s economic policies are in shambles leading to a sharp decline in the confidence of businessmen and investors.
India’s economy has slowed down drastically from 9% in early 2016 to 5.6% of Gross Value Added (GVA) growth in April-June 2017. The unemployment is increasing amid collapse in industrial production and private investment.
In September, the Organization for Economic Cooperation and Development scaled back its economic growth forecast for India to 6.7% for 2018, down from 7.3% predicted earlier this year. Other organizations and banks have made similar downward revisions.
Dr Subramanian Swamy while saying that the economy is in tailspin, highlighted that one of the reasons for economy going down is the decrease in investments. He said that we might claim that we are getting huge FDI, the fact is investments are down. He also said that the interest rate has killed Small and Medium Enterprise (SME) and banks are on the verge of collapse. SME has crippled because they are being denied credit because of high interest rates. He said that in Yokohama conference recently, the rating agency gave India BBB minus credit rating. Real credit growth from an average of 18% in 2011-14 has slumped to 6% per cent in 2017 resulting in sharp decline in investment and growth. We also have unemployment increasing with no fresh creation of jobs as the manufacturing, real estate and agriculture have been severely hit.
In an interview to the media, Swamy also pointed out the fact that since the base year has been revised and fixed at 2011-12, the growth rate and other indicators are any way showing higher figures because of higher growth in this period as compared to the old base year 2004-05. If calculated on the basis of 2004-05, the GVA number would actually be around 4.9%. It must be noted that earlier in 2015, the Central Statistics Office (CSO) under the Statistics Ministry had changed the base year for tabulating the GDP or size of economy to 2011-12 from 2004-05. So, the figures will be worse than what are being presented if calculated on the basis of old base year.
More recently, the CSO has changed the base of Index of Industrial Production (IIP) to 2011-12 from 2004-05. Besides, the base year of Wholesale Price Index (WPI) has also been changed to 2011-12 from 2004- 05. In the notification dated May12, 2017, the Ministry of Finance said that the base year of All-India WPI has been revised from 2004-05 to 2011-12 by the Office of Economic Advisor (OEA), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry to align it with the base year of other macroeconomic indicators like the GDP and IIP.
Yashwant Sinha, who recently wrote an article in the Indian Express indicting the government for the state of affairs in the economy, mentioned this fact too. He wrote that that the methodology for calculation of the GDP was changed by the present government in 2015, as a result of which the growth rate recorded earlier increased statistically by over 200 basis points on an annual basis. So, he wrote, according to the old method of calculation, the growth rate of 5.7% is actually 3.7% or less.
According to the data released by the government, GDP Q1 of 2017-18 shows a growth rate of 5.7%.
Quarterly Gross Value Added (GVA), a measure of total output and income in the economy giving a sector-specific picture of growth, for Q1 of 2017-18 shows a growth rate of 5.6% over the corresponding quarter of previous year.
The only economic activities which have registered growth of over 7% in Q1 of 2017-18 over Q1 of 2016-17 are: trade, hotels, transport & communication and services related to broadcasting; public administration, defence and other services; and electricity, gas water supply & other utility services.
Quarterly GVA for Q1 2017-18 from this sector grew by 2.3% as compared to growth of 2.5% in Q1 2016-17.
Quarterly GVA for Q1 2017-18 from this sector had a negative growth of (-) 0.7 percent as compared to growth of (-) 0.9 percent in Q1 2016-17. The key indicators of mining sector, namely, production of coal, crude oil and natural gas and IIP mining registered growth rates of (-)4.4 per cent, 0.2 percent, 4.0 percent and 1.2 percent, during Q1 of 2017-18.
Quarterly GVA grew only by 1.2 percent as compared to growth of 10.7 percent in Q1 2016-17.
The private corporate sector growth as estimated from available data of listed companies with BSE and NSE stood at negative growth of (-) 0.9 percent at current prices during Q1 of 2017-18 as against 10.2 percent in Q1 of 2016-17. The quasi corporate and unorganized segment (which has a share of over 20 percent in the manufacturing sector) has registered growth rate of 1.8 percent during Q1 of 2017-18 as compared to 6.7 percent during Q1 of 2016-17.
Quarterly GVA at basic prices for Q1 2017-18 for this sector grew by 7.0 percent as compared to growth of 10.3 percent in Q1 2016-17.
Quarterly GVA at basic prices for Q1 2017-18 grew by 2.0 percent as compared to growth of 3.1 percent in Q1 2016-17.
Key indicators of construction sector, namely, production of cement, consumption of finished steel and IIP of non-metallic minerals registered growth rates of (-)2.9 per cent, 4.6 percent and (-)3.2 percent, respectively, during Q1 of 2017-18 as compared to 5.8 percent, 1.3 percent and 5.7 percent respectively, in Q1 of 2016-17.
Showing a positive growth, the quarterly GVA from this sector grew by 11.1 percent as compared to growth of 8.9 percent in Q1 2016-17.
Quarterly GVA at basic prices for Q1 2017- 18 from this sector grew by 6.4 percent as compared to growth of 9.4 percent in Q1 2016-17.
The other indicators of this sector, viz., aggregate bank deposits, and bank credits have shown growth rates of 13.3 per cent and 8.6 per cent, respectively as on June 2017.
Showing a positive growth, the quarterly GVA at basic prices for Q1 2017-18 from this sector grew by 9.5 percent as compared to growth of 8.6 percent in Q1 2016-17. The key indicator of this sector namely, Union Government revenue expenditure net of interest payments excluding subsidies grew by 19.8 percent during Q1 of 2017-18 as compared to 20.8 percent in Q1 of 2016- 17.
Arvind Subramanian, Chief Economic Adviser, while talking to the media at the release of the fourth quarter data had said, “I would say that the data is broadly consistent with what we said in the economic survey. The quarter which you’d expect to be the weakest is the fourth quarter because that’s when, if you did the arithmetic correctly on how the monetary aggregates were behaving, the fourth quarter would be the one which would have the biggest impact. We had also said that it would bottom out as remonetisation takes place. I think we can see some signs of bottoming out and a recovery in the nominal aggregates which, in fact, did pick up in the fourth quarter.”
But far from showing any signs of bottoming out, the Reserve Bank of India (RBI) in its recent research report accepted the decline and it said, “We certainly believe that we are in a slowdown mode since September 2016 and it has been prolonged to Q1 of this fiscal year, is technically not short-term in nature or even transient.” RBI has lowered the economic growth forecast for the fiscal year 2017-18 to 6.7% from 7.3% earlier.
However, the RBI has also cautioned government of any fiscal profligacy given the pressure on the government to spend more.
More recently, in a Consumer Confidence Survey of the RBI, the consumer confidence has been shown as declining. More people see consumer confidence declining, business sentiment in manufacturing dipping, inflation on the rise and growth sliding. The survey says that the current perceptions of households on the general economic situation remained in the pessimistic zone for four successive quarters, with the economic outlook worsening.
According to the survey, 40.7 per cent of respondents say the economic situation has worsened in September 2017 as against 25.3 per cent in the same period last year
On employment prospects, as much as 43.7 per cent of respondents believed current perception about employment has “worsened”, which is much higher than the 31.4 per cent in November 2016.
In the Industrial Outlook Survey of the Manufacturing Sector for Q2 of 2017-18, the RBI said that overall, business sentiment in the manufacturing sector has worsened, as reflected in the decline in the Business Expectations Index (BEI) from 105.4 in Q1 of 2017-18 to 103.6 in Q2 of 2017-18.
One of the reasons for economy going down is the decrease in investments. He said that we might claim that we are getting huge FDI, the fact is investments are down. He also said that the interest rate has killed Small and Medium Enterprise (SME) and banks are on the verge of collapse. SME has crippled because they are being denied credit because of high interest rates. He said that in Yokohama conference recently, the rating agency gave India BBB-minus credit rating.
India needed to focus on infrastructure, power and exports to stimulate GDP growth, which has been hit by factors like demonetisation. “We should not be so pessimistic and say that good times are over but we should be worried...growth had started falling from quarter which ended September last year”.
For boosting economic growth, government needs to take many measures. According to Dr Urjit Patel, “Measures need to be undertaken to support growth and achieve a faster closure of the output gap, including restarting stalled investment projects, including in the public sector, enhancing ease of doing business, including by further possible simplification of the GST and ensure faster rollout of the affordable housing program with time-bound single window clearances.”
However, in the recent review of the policy by RBI, their Monitoring Policy Committee held firm on interest rates amid concerns over prices. According to their report, the committee is mandated to keep inflation at 4% with a margin of two percentage points on either side. According to a report, barring one member, the remaining five members of the MPC were against easing of rates Former RBI Governor Raghuram Rajan, in in an interview to the media has said that India needed to focus on infrastructure, power and exports to stimulate GDP growth, which has been hit by factors like demonetisation. “We should not be so pessimistic and say that good times are over but we should be worried…growth had started falling from quarter which ended September last year,” he said in that interview.
A joint report by ASSOCHAM-EY stated that if India has to maintain a sustained gross domestic product (GDP) growth of 9- 10 per cent per annum, it is crucial that the manufacturing sector grows steadily at 14- 15 per cent per annum over the next three decades
After the numbers were released, India Inc expressed deep disappointment over India’s economic growth. P Chidambaram said that GDP and GVA figures were more evidence of Dr Manmohan Singh’s indictment of ‘monumental mismanagement’. But, Arun Jaitley attributed the lower GDP numbers to pre-GST destocking of goods.
However, the government now knows which direction India’s economy is headed and it has started consultations to take measures in order to address the issues like demonitisation and GST. In a Cabinet meeting recently the government discussed proposals related to providing stimulus to medium and small-scale industries, exports and the textile sector which have not performed to their optimum strength in the last few quarters.
The Finance Secretary Ashok Lavasa has said that the economy is going through a phase of readjustment to a system of formalization and the government sees the decline in growth as a hiccup and expects the economy to do better in the second quarter 2017-18. The demonitisation and the badly-implemented and poorly-conceived GST had a disastrous effect on the economy.
In India, the ease of doing business remains a problem and it was expressed by Industry chamber PHDCCI too. Manufacturing firms, particularly labour intensive units, are impacted by various stringent laws and compliance costs. The government is realising the gravity of their misadventure and its implication and they have started addressing the problems. So, there is a hope that with this effort of the government, the present situation will bottom out soon.
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