Economic growth isn’t achieved merely by change of governments, or by a series of electoral victories. Although governments keep making tall claims and paint rosy pictures in front of public, they themselves don’t let it get to their head as they know growth results only when a host of factors fire in tandem.
However, the NDA government is exceptional. It not only massaged economic data to establish that growth had started rising right after Modi’s election wave in 2014, but also imbibed in it this fantasy quite seriously.
While most cogent observers, including finance ministry and the Reserve Bank (RBI), were genuinely sceptical about the revised growth data released in February 2015, the government still went ahead with it and unleashed demonetisation and GST on a structurally beleaguered economy.
India’s existing economic calamity is much wider and deeper because the economy has been reeling under rough weather since 2013. The Modi government had inherited a structurally frail economy and further most of the key growth drivers kept reeling under constant stress for the last three years. However, the political leadership of NDA government overlooked the inherent fragility of economy and crushed it with a sinister note ban and flawed GST.
The growth story under Modi regime is strange and puzzling. The Economic Survey 2013-14, the year preceding the sign-in by Modi government, had warned about a sub-five per cent growth rate. However, new data (based on new base year for calculating national accounts – 2011-12 instead of 2004-05) series launched in January 2015, sharply revised 2013-14 GDP growth estimate to 6.9 per cent from 4.7 per cent. The 2012-13 growth estimate was also revised to 5.1 per cent from 4.5 per cent. It was the first time that Indian economy was projected to be bigger than $2 trillion i.e. $2.1 trillion in 2014-15.
The new data series had baffled analysts because of the wide variations from estimates based on the old base and concurrent realities. The government’s own economic survey of 2016-17 noted:
“In last two years real GDP growth has averaged about 7.5 per cent. But this has been achieved against the context of weak investment, export volume and credit growth. This wedge between steady growth and its underlying (relatively weak) drivers raise a question and also pose a puzzle.”
Interestingly, the economic survey failed to find another case of 7 per cent growth without investment, export and credit growth in the last 25 years in any of the emerging markets.
Nonetheless, the perceived high growth went to the government’s head and triggered the positive spin mill to circumvent harsh economic realities.
The fact remains that the farm stress has actually intensified in the last three years due to poor weather conditions and culminated into farmers’ unrest and large-scale loan waivers in major agricultural states during the current financial year.
The deficit position of states deteriorated. During FY 2016, the consolidated fiscal deficit of states increased by about 1 percentage point to 3.6 per cent of the GDP. In the last three years, the public investment (centre, states, CPSEs) has remained in the range of 6 to 6.6 per cent of GDP and is expected to decline in the current financial year, tells economic survey.
The highly stressed banking sector has melted further under the Modi regime. As of June 2017, the combined gross non-performing assets (GNPAs) of 41 listed Indian banks stood at a whopping Rs 8.28 lakh crore. The dilapidated profitability of power and telecom sectors has opened new fault lines in the banking system. In spite of the fact that the Reserve Bank of India has cut the interest rate as much as eight times since January 2014, the bank credit growth has slowed to a new historic low of 6.2 per cent in July this year.
Going by the awful state of key growth drivers, no government in the world would have gone for an ill-conceived currency squeeze and a defective indirect tax reform. However, the government crushed consumer spending and production through back-to-back whammies of demonetisation and GST.
In an era of globalisation, fudging with the economic data is the riskiest bet. The crisis of Greece is still fresh in our memories. Greece had fudged its fiscal deficit data in order to make its entry in the Euro currency club. In 2009, after the revelation of this fudging, the country’s credibility suffered a major blow and caused its slide into a deeper crisis.
Thankfully most of the observers, including Yashwant Sinha, the former finance minister, have taken the new GDP data with a pinch of salt. But nobody can stop the government, driven by the imaginative high growth fancy, going berserk over serious economic disruptions.
As things stand today, despite all the data kneading, we are in a grip of deep slowdown. It is high-time for government to accept the reality and start course correction.
As far as learning is concerned, as Milton Friedman said rightly: Governments never learn. Only people learn.
Article first appeared at dailyo.in