This Article is From Feb 01, 2016

Modi-ji, your acche din are the same as purane din

At Davos and other forums, India is being showcased as "the world's fastest growing economy". But that's not because we are accelerating; it is because all others, particularly China, are slowing down.  

This column has drawn attention in the past to the statistical sleight of hand that has added about 1.5 per cent to our growth rate by changing the base year and widening the ambit of the sample that gives us the new rate. In effect, therefore, at today's 7 per cent we are either growing at the same 5.5 per cent that UPA-II left us with - or the rate of growth in the year UPA-II demitted office was 7 per cent on the new statistical basis. In other words, the growth rate of GDP is the same in these acche din as it was in the purane din.

For all Arun Jaitley's empty budget boast of taking the economy soaring to 8.5 per cent, we remain where we were - and in some ways much worse off - than before the May 2014 elections. In its halcyon day before the 2008 global financial crisis, Dr. Manmohan Singh and his government had taken us to 9.4 per cent. We could credibly talk of double-digit growth and overtaking China when China was growing at 12 per cent. Today, just maintaining the 7 per cent growth rate (on the new scale) that the BJP inherited would amount to a minor miracle.

This is astonishing considering that when the UPA was in office, crude oil was ruling at well over $100 a barrel, indeed, touching a high of $140. And is today sinking below $30 to around $27 as this column goes online. Instead of cashing in on this bonus, the rupee is floundering at 69 to the dollar, the lowest ever, while the stock market has plummeted to the same level it was at before the Modi bubble blew it upwards to unprecedented heights. Now, reality is taking over.

In the first Modi year, 2014-15, agricultural growth recorded a miserable 1.1 per cent advance. This year, 2015-16, has been worse. I expect the Economic Survey, when it is published later this month, to confirm that agricultural growth has indeed turned negative. While governments can do little to control nature, there are always earthly measures they can take to contain the ill effects on the farmer of monsoon failure or other natural disasters. Indeed, challenge can even be turned into opportunity as Rajiv Gandhi proved by taking up the challenge during the terrible drought of 1987-88, the worst since Independence, through drought relief and drought-proofing measures that resulted in more being spent in devastated Rajasthan in a single year than in all the 40 years since freedom came at midnight. In consequence, the economy not only bounced back but, in 1988-89, recorded the first and last time ever that the economy grew in double digits - 10.87 per cent to be precise. Significantly, dry-land crops like pulses and oil seeds attained in that year their highest output till then.

Rajiv did it by visiting every drought-ridden state in the country, often driving his own car, stopping unannounced by the wayside and spending hours in conversation with the distraught farmers, followed by action-oriented discussions with state ministers and bureaucrats till late into the night. Our present PM has been seen in the exalted presence of all world leaders but never with a living Indian kisan or khet mazdoor or a suicide-driven kisan's family. That is the difference between leading from the front in a crisis, and praying for rain in luxurious foreign hotel suites.         

In the manufacturing sector, there is stagnation. "Corporate profits in relation to GDP," says T.N. Ninan in the Business Standard of January 2016, "are at a decadal low." Infrastructure is in crisis, with power generation growing at less than three per cent, and railways missing their freight traffic targets. So, while the government is busy planning to sell the family silver in order to pay the butler, disinvestment has been so slow and haphazard as to make a mockery of Jaitley's budget targets. In any case, the state of our stock markets is such that this would be quite the wrong time to dispose of invaluable public sector assets in the market.

To revive manufacturing, the government would either have to throw its fiscal deficit targets to the winds and thus threaten macroeconomic stability, or pump up private investment by fiscal stimuli that would unbalance the books and be firmly resisted by the Reserve Bank. In his C.D. Deshmukh lecture last week, Governor Rajan pointed to the consolidated fiscal deficit of the Centre and the States having risen from 7 per cent to 7.2 per cent between Modi's first year, 2014, and Modi's second year, 2015. "So, we actually expanded the aggregate deficit in the last calendar year," he added. He underlined that the consolidated fiscal deficit "is by far the largest among the countries we like to compare ourselves with". Notwithstanding a substantial rise in tax revenues, particularly from (regressive) indirect taxes, fiscal indiscipline has been so rampant that Jaitley's attempts to deride UPA-II's performance on this score have backfired and Modi's new scheme, UDAY (Ujwal Discom Assurance Yojana) is going to add such a fiscal burden to states, that the consolidated fiscal deficit is likely to zoom to 7.5 per cent of GDP in the coming 2016-17 fiscal year.

With any significant fiscal stimulus thus ruled out, manufacturing firms will have to turn to the banking system to "Make in India". And the banking sector is in even worse shape than the firms themselves. The highly regarded Swiss research arm of Credit Suisse have estimated that India's ten top borrowers hold between them some Rs 7.3 lakh crore of bank credit, of which about 40 per cent, or Rs 3 lakh crore, are regarded as "severely stressed" - which is Bank-lingo for loans that will not be paid back but can be recycled by "ever-greening" (converting outstandings into renewed loans), thus enabling both the firms and the banks to (barely) retain their "good name". This unholy alliance between government, the banking sector and big business (more accurately and damningly known as 'crony capitalism') has broken the link between the RBI's interest rate and commercial banking rates, left banks (especially public sector banks) in dire straits, raised interest rates for smaller borrowers and dried out credit for fresh investment. This combination of broke private sector bigwigs and broke banks is most severely impacting in precisely those sectors where public or public-private investment can make the most difference to the real economy - power, roads and telecom, as well as steel where world prices have collapsed.

With agrarian distress having sharply reduced rural demand, manufacturing stagnant when not actually in decline (as it has been declining in several successive quarters), one looks haplessly at the export sector to see whether any hope lies there. The answer is India's exports during April-December 2015 were a deeply disturbing 18.8 per cent below the same period last year. Inevitably, and  notwithstanding the steep fall in crude oil prices, the rupee has depreciated by a massive 9 per cent despite RBI's efforts to boost the rupee by spending some $3.6 billion to arrest the decline.

From where will fresh investment come in these circumstances? How can we facilitate the transition of the Indian economy from being consumption-driven to investment-driven? Where, in other words, are our acche din - and when are they coming?

(Mani Shankar Aiyar is a Congress MP in the Rajya Sabha.)

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