India’s economy accelerated faster than China in the first quarter of 2015

31 May 2015 | Author: | No comments yet »

Economy is Weak, Stocks Are In A Bubble, And Washington Must Change Course.

A day after official data showed India’s economy grew 7.3 per cent in 2014-15, slightly lower than the advanced estimate of 7.4 per cent, Chief Economic Advisor Arvind Subramanian retains the projection of 8.1-8.5 per cent growth for this financial year. He tells Indivjal Dhasmana all the factors on which the projection in Economic Survey 2014-15 is based are valid, with a possible exception of the monsoon. For the Reserve Bank of India (RBI), which will announce its monetary policy on Tuesday, the GDP numbers are unlikely to claim any major influence on its rate cut stance.

About 30 days after each calendar quarter the Bureau of Economic Analysis (BEA) releases its report on how the economy performed during the previous quarter. Edited excerpts: Growth in output of the agriculture and allied sectors was almost flat in 2014-15 and the sector contracted in the third and fourth quarters.

Now, if one accepts the current government’s 7.3 percent as true then one has to accept the previous government’s 6.9 too because methodology and numbers are neutral quantities. The logic behind the 2015-16 forecast was growth would be greater in 2015-16 relative to 2014-15 by a margin greater than growth in 2014-15 over 2013-14. The average growth in the decade between 2004 and 2014 was close to eight percent – though former finance minister P Chidambaram would insist it was 8.5 percent. The reasons for that increase were lower oil prices, the cumulative impact of reforms, easier monetary conditions, less fiscal consolidation and a monsoon that isn’t as bad. It could be argued that the gap between the potential of the economy and actual delivery is massive, but that’s a matter of subjective interpretation.

To put it differently, if growth could pick up in 2014-15 relative to 2013-14 by about 0.6 per cent (at basic prices) and 0.4 per cent (at market prices) despite a poor monsoon and fiscal consolidation, why would it not pick up by more for all the reasons suggested above? This is when China has decelerated from 10 percent plus in the last three decades to the sub eight territory in recent years and looks set for a prolonged low growth period, the US is still reviving at five percent and the rest of the world is performing poorly. Let’s take out the argument that China and the US are multi-trillion dollar economies and from their base a growth of five percent is much bigger than India’s eight percent; the same way you cannot compare Bihar’s growth with Gujarat’s. What the numbers suggest is India has managed to maintain a steady growth momentum despite the blip over a couple of years due to global headwinds and policy chaos at home.

The Narendra Modi government’s push to the manufacturing sector through the Make in India initiative and its emphasis on infrastructure as the vehicle of growth are likely to place the country in a trajectory where China used to be not long ago. Rating agency, Care has noted that capital formation in the economy continues to decline and this is something the government needs to address in the years ahead. This last item centers on fiscal policy (i.e. tax policy and regulations) which has stifled small businesses, long considered to be the lifeblood of the U.S. economy.

Given that higher public spending is key to reboot growth, the NDA’s obsession with fiscal deficit numbers is something that can potentially delay the growth recovery on the ground. Clearly, the extended run up in the stock market, which long-term requires a healthy economy for strong profits, is in the early to mid-stage of a bubble.

I believe there are two reasons why these data may be reasonably reliable: IIP indicators have suggested growth of three-four per cent on an annual basis in 2014-15. The numbers may please rating agencies and investors but without percolation of the benefits of the growth process deep enough it guarantees no political return. Even though numbers of the first two quarters were also released, the revisions were, albeit, marginal. “The downward revision in Q3 suggests some loss of momentum began in the second half of FY2015.

But these are volume indicators and at a time when input prices are declining substantially, recall that the level of wholesale prices has declined (negative inflation) six months in a row; volume indicators could be under-stating value-added growth. The GVA (gross value added), however, has a different story to tell, showing a marked sequential slowdown from Q2 onwards, implying that larger growth has come on account of net taxes on products,” Reuters quoted Yes Bank chief economist, Shubhada Rao as saying.

Unless and until a new regime is installed in Washington, one which is more business friendly and less concerned with remaining in power, I fear the economy will continue to suffer. The prime minister and Finance Minister Arun Jaitley have been facing flak from even their biggest supporters for being incrementalists in their approach rather than being bold. The factory output numbers for the recent months, bank credit growth and the movement trend of the stressed assets in the banking system indicate things haven’t really improved.

The stark contrast between the GDP figures and ground reality should be questioned. “The higher growth number in value added in sectors like manufacturing and services like finance, trade, transport, etc. have pushed growth up. While nominal credit growth has declined, real credit growth (growth adjusted for inflation) has been constant and, perhaps, even shown a slight uptick.

This is also true for broader measures of financing for corporates, including non-bank sources such as bonds, ECBs (external commercial borrowings) and NBFCs (non-banking financial companies). On the other side, banks are sitting with bad loans of over Rs 3,00,000 crore on their books and a substantial chunk of restructured loans, which together constitutes over 12 per cent of the total bank loans given.

Data sourced from corporate debt restructuring cell (CDR), a forum of banks that takes up cases of large restructuring proposals, shows that Rs 57,000 crore worth restructured assets were tagged as failed loans and accounts that failed to recover despite recasts, at the end of March quarter. Their cheerleaders would like the Modi-Jaitley duo to go for political confrontation to push through a radical economic agenda to pitchfork growth to a higher orbit. We have seen that the stalling rate of projects has declined but the question is whether new investments, both in the public and private sectors, are seeing a strong turnaround.

In 2014-15, consumption growth has remained broadly stable — government consumption has declined, reflecting the sharp fiscal consolidation; exports have declined, reflecting the difficult international environment; and capital formation has increased. There is gradual realization that confrontation does not help, particularly when there are more areas of convergence than divergence in economic thinking among a large section of the political class. Hopefully, the pick-up in investment will be sustained, especially if public projects are implemented quickly and stalled projects resolved and accelerated.

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