Insights into Editorial: An unexceptional economic performance
Recently, the Central Statistics Office (CSO) released much-awaited estimates of National income for the final quarter of the 2017-18 financial year.
The government embraced the GDP figures to declare that it has successfully “accelerated growth”. However, while this holds true for the past few quarters it does not when the past four years are taken into the reckoning.
Annual Growth since 2014:
The facts are that the annual rate of growth since 2014 has first risen and then declined. By 2017-18 growth at 6.6% was less than the 6.9%(in 2014).
Demonetisation has definitely accentuated the unemployment problem, especially in construction and real estate sector as they are cash rich sector. But one thing these numbers have cleared the misconception of lot of authorities who without having data had unnecessarily castigated the GDP makers for having fudged data.
Measurement of Growth and Economic performance:
The Indian Statistical System is robust and gives a clearer real picture.
There are of course other aspects of an economy that should legitimately be of our concern but this government has generally prioritised production as reflected in its attention to the ‘ease of doing business’ and its flagship programme ‘Make in India’.
It is indeed right that there should be focus on production, as incomes are low in India and the expansion of employment is a function of the growth of output.
The accelerating growth in the most recent quarters may be placed in perspective as follows: the economy is accelerating along a lower growth path. Further, and it needs recognition, that the present government had inherited a strongly accelerating economy.
Fiscal consolidation, as this drive is tendentiously referred to, lowers aggregate demand. Its votaries claim that ‘crowding out’ will work in reverse to boost private investment, thus restoring the original position. This has not happened yet, and a decade is a long enough time to have allowed it to play out if it is inevitable.
There is a way of dealing with the demand-contracting effects of fiscal consolidation. That is, to bring about expenditure switching in the government budget, whereby expenditures with high multiplier effects are privileged over those with a lower potential on this score.
Two points may be made about the Modi government’s budgetary strategy.
- First, over the five budgets it has presented, it has maintained the share of capital expenditure but this has occurred alongside a declining total expenditure, perhaps motivated by the pursuit of ‘less government’. The net effect of these is a slightly lower budgetary capital outlay as a share of GDP.
- Second, the rate of growth of ‘government final consumption expenditure’ has been steadily increased. The growth implications of such a strategy are obvious.
Though producer price inflation has continued its downward trend since 2014, the policy rate of the Reserve Bank of India has not kept pace, raising the real cost of borrowing.
While there has been self-congratulation on the part of government that it engineered a shift to inflation targeting as the alpha and the omega of monetary policy in India, there is insufficient acknowledgement that when faced with food price inflation the mechanism works by sacrificing output.
The irony is that while India finally has ‘inflation targeting’ it does not yet have an effective anti-inflationary policy, which would be to ensure food supply at steady price. So, unimaginative conduct of macroeconomic policy has resulted in slowing demand growth.
The second factor contributing to slack demand in the economy has been agricultural performance. In the first two years of the government, the weather cycle wreaked havoc by reducing agricultural output in 2014-15 and barely increasing it in 2015-16. The growth of agricultural incomes could not but have been affected by this. In 2016-17, however, agricultural output rebounded, posting very strong growth.
But now demonetisation, by disrupting the supply chain, is likely to have not just stymied the growth of agricultural incomes but actually lowered them. The growth of manufacturing reflects this. The CSO’s estimates show that it declined considerably in 2016-17, and by 2017-18 was barely half of what it was in the year before the demonetisation.
‘Make in India’, which had targeted manufacturing, has not had much success despite any progress made on the ease of doing business.
Despite the advantages, drawbacks are:
What about the role of the external environment in domestic growth? For three years running from 2014-15 the price of oil fell continuously. The windfall could have been used to step up India’s creaking public infrastructure to address hardship and boost demand. But it appears to have been used up expanding government consumption expenditure.
Another favourable development, which unlike the oil price decline continues, is that the world economy is growing steadily for the first time since the global economic crisis set off in 2007-08. Surprisingly, however, India’s export performance since 2014 is far less impressive than it was in the five years following the crisis.
The balance of payments is being shored up by capital inflow, much of it short-term. India’s high foreign reserves, advertised by the Prime Minister at Davos, reflect this aspect rather than dollars earned. This is costly for growth. It keeps interest rates high and demand shackled.
Making the Growth Trajectory back on Track:
Creating a climate for investment is important because the demand has gone down in several sectors of economy and the industry is not pouring new money into manufacturing and operations.
So government has to do things on several fronts. Government should concentrate on infrastructure projects which will be generating good deal of demand in future. The real estate has the maximum forward and backward linkages and here is where government should focus the most.
Construction, employment orientation, employment intensive, addressing issue of land availability, affordable housing- making it feasible should help the economy.
The Government expenditure can be increased in three sectors
- Railways no longer have fund constraint that was present earlier- lines of credit LIC, people willing to invest, government support has increased. However, railway’s capacity to spend money needs to be developed.
- PPP in highways is going to take a long time. Now EPC has come in where government spends money and contractors are private sector. Also, an annual hybrid annuity model has been tried where private sector also plays some role.
- Electricity sector investments have come down by saying that there is electricity surplus in some states. But there is a surplus because there is no demand! India needs to continue to add 5-6% to its capacity in generation and increase electricity infrastructure to provide electricity in all the parts of the country.
Thus, India’s macroeconomic front is reasonably sound. It is possible to take risk to economic boost. Growth has to come from private sector. If the government tries to expand and tries to spend out of its way, it will hit the macroeconomic situation. Fiscal deficit ceiling cannot be breached.
The private sector in India depends on government to give signal which is problematic. GST, IBBI enactment, fiscal ceiling are the solid measures to put the growth trajectory on sound footing.
Measure needed to improve Economic performance of the country:
- Increase the demand scenario, with the revival of rural demand.
- More focus on MSMEs development.
- Capacity utilization problem will also be solved if there is increase in demand.
- Despite rise in crude oil prices or increasing US federal interest rates, India has remained stable.
- Focus on infrastructure development with public spending, particular agriculture sector to solve the supply side problems because inflation is again increasing.
- Focus on Export basket scenario. Global market is reviving but not able to compete due to domestic issues. Focus on exporters to increase competitiveness in international market
- Focus on stalled projects which can revive the demand for raw materials and basic industries.
There shouldn’t be a single goal oriented fiscal policy and single goal oriented monetary policy.
The interest rate, exchange rate and fiscal deficit have to work together keeping in mind internal balance and external balance. It is very important to know whether the deficit is to create Asset or run revenue expenditure.
The FRBM is expenditure switching mechanism from revenue deficit to capital expenditure. FRBM has three targets
- Fiscal deficit
- Revenue deficit
- Public debt target
It is more crucial to achieve Revenue debt target rather than fiscal deficit. If the government is forced to achieve 3.25 % fiscal deficit, there will be impact on outstanding liability.
The 3.2% fiscal deficit was assumed when there were no shocks in the economy. Now there is effect of demonetization, GST which has contributed to ring down the fiscal deficit. Hence, the government should avoid sticking to FRBM target very strictly at the same time focus on Capital Expenditure.