US economy shrank at 0.7 percent rate in first quarter | Business News

US economy shrank at 0.7 percent rate in first quarter

31 May 2015 | Author: | No comments yet »

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

The 7.5 per cent growth in Gross Domestic Product (GDP) recorded in the fourth quarter (the number for the full fiscal year 2015 is 7.3 per cent) theoretically makes India the fastest growing major economy in the world, beating China (the Chinese economy grew 7 per cent in the March quarter and 7.4 per cent for the full calendar year 2014) and far ahead of other comparable economies. 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. 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 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. 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. 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. Second, some economists have begun sounding caution on the sharp downward revision in the third quarter number (revised downwards to 6.6 per cent from 7.5 per cent) saying this signals the beginning of further slowdown in the second half of last fiscal year. 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. 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. 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. 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.

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