The Big Picture- Is The Indian Economy Stressed?
The economists and analysts have mixed answers on the status of Indian economy at present. A good monsoon, the 7th Pay Commission bonanza going into the pockets of the government servants leading to a demand creation, a 7% GDP at GVA, increased revenue collections, Rs.65000 crore black money disclosure are all signs of an economy looking up. However at the same time, huge bad and stressed loans from the banks, slump in credit growth in industrial sector, job creation not happening are some of the clear indications of economy under stress.
Reasons for Confusion:
- There is one sector i.e. the manufacturing which is recovering very slowly than expected. India had a consumer boom in rural areas earlier because of the big increases in MSP and expansion in MGNREGA. Both these factors are static now. Because our perceptions are shaped so much pertaining to the numbers in manufacturing sector, it causes confusion.
- Exports are not going very well. It has been on a negative side for last 20 months. This comes from the fact that the external sector is presenting a very confused picture like the US economy doing better, China slowing down, BRICS on the whole slowing down etc.
- The investment rate in the Indian economy has not really picked up the way it should have picked up. It had peaked in 2007-08 to 38% which fell to 28% and is around 32% now.
- NPA is very high which means that the credit to industries is a problem especially to the infrastructure and this is area where growth is expected to take place because lot of money is invested in this sector. Capital goods production this year is down by 22%. In the last few months, Indian economy has been driven by foreign investments and public investments.
- Agriculture for the last 2 years faced drought and therefore, demand there was a bit slack. This may increase this year as the monsoon was average along with the credit off take.
- The argument on 7th Pay Commission giving big boost to the economy is misleading and is certainly not going to happen because even if it is Rs. 1 lakh crore the economy is Rs. 150 lakh crore which is less than 0.7% of the GDP.
- The confusion is also prevailing because of the mixing of old indicators like IIP with the new indicators like shifting of the base year, CPI, WPI etc. It is high time that the IIP numbers should be dumped as they are giving wrong indications.
- Industries are still not phasing out capacity shortage which is why they are still not investing. Capacity utilization is not as expected. One area where investment started taking off is construction because of road projects. Basically corporates have to restructure their balance sheets which will take time.
- Overall investments have to be increased. Private sector investments are less as compared to public sector investments. FDI cannot really compensate for the declining investments because it constitutes 10% of the total investment while 90% is internal investment.
- Regarding credit, may be the private sector takes credit from elsewhere and therefore, credit growth has not been significant. Inventories are going down because possibly the industries are expecting that the demand would not pick up which is another reason for decline in credit growth.
Challenges and Options Ahead:
The biggest challenge today is to create jobs both in organized and unorganized sectors. On the resources side, there is definitely a cause of concern and therefore, in the beginning of the budget it was said that achieving 3.5% growth might be a big challenge as the revenue forecasts made that time were slightly unrealistic and there was lot of bet on spectrum auction and disinvestment. One area where the Government got more than what they budgeted was RBI transfers to the Finance Ministry. Relying on capital receipts like spectrum auctions or black money transfers is an ad hoc arrangement for running the economy. There is a need to have stable, predictable policy that can be applied for consecutive years.
RBI has reduced the interest rates. It might help up to a certain extent but cannot make a huge difference unless the banks really pass it on like in case of personal loans where EMIs are to be paid by the people and reducing interest rates can be of significant importance. However, decrease in interest rates not always lead to investment increase like in case of US and Europe where interest rates are down to zero. There also has to be increase in demand, better capacity utilization accompanied with reduced interest rates to make investments feasible. There needs to be incentives for new entrants to invest. Rural demands are expected to go up because of good monsoon and public intervention along with urban demands because of Pay Commission impact. There needs to be a firm basis for genuine public investment. There has to be a cleaning up of balance sheets of banks so that they are able to carry out their business and this was emphasized by Dr. Raghuram Rajan as well.
In the overall picture of the Indian economy, the confusion is on how much the services sector is growing, what happens to the index of industrial production and what happens to the GVA as per new data. For this, the RBI or the Ministry of Finance needs to make an attempt to sort these confusions out and make the true picture of growth clear.