The Indian economy’s recent antics are a bit disconcerting. For many years, it has grown at 7-8% with inflation at about the same level.
Other parameters have been consistent with this steady flow. But in recent quarters, it has been deviating from this robust expectation. It grew a comfortable 7.9% in the first quarter of 2018.
Since then, the growth rate has steadily come down to 7.7%, 6.9%, 6.3% and 5.9%. It is our luck that government grew 10.7%, and money and speculation 9.5%. Without these high-fliers, growth would have been lucky to touch 4%.
The rush to ‘Make in India’ gave a modest manufacturing growth rate of 3.1%. The number of cars made in India fell to 1,82,000 in June, a level reached in 2014. It is as if five years’ growth in output has been wiped out.
Consumers will be happy to know that consumer prices in June were only 2.2% above a year earlier. True, meat and fish prices went up 9%, drugs and medical services 8.2%, and education 6.8%. But good luck cannot always be related to good products.
Paan, tobacco and alcohol prices went up only 3.1%, and recreation and amusement 5.2%. Let us be amused.
Our normally huge trade deficit has gone down. It is not because exports have boomed — they went up 7% in the quarter of March-to-May. It is imports: they rose only 1%. Why? With the economy in stagnation, what else can one expect? Domestic producers are producing what was being imported earlier.
Investors brought in $15 billion more in the first quarter of 2019 than in the year before. But banks, which had brought in $4.6 billion last year, sent out $8 billion in the first quarter. Still, foreign exchange reserves went up $25 billion. Reserve Bank of India (RBI) governor Shaktikanta Das, who replaced Urjit Patel, had a stack of $429 billion under his throne.
Wake Me Up at Sunrise
For decades, the Indian economy was inclined to grow fast — so fast that it caused high inflation. For now, it has lost its verve. Growth is tepid, and inflation is ridiculously low. What has happened? Essentially, Indian business is depressed.
It is pessimistic about India’s growth prospects, and disinclined to invest. Even if it wanted to invest, many businesses have debts they cannot repay.
In a better-run economy, these businesses would have been declared insolvent and closed down. Today, such businesses can neither grow nor disappear, and a new generation of healthy businesses is not in sight.
They talk of a business cycle, and wait for the inevitable upturn. They are right, but whether it will come next year or a decade later, no one can say. For now, the economy is creeping.
Why did this happen? There are essentially three drivers of growth: external account, the fisc, and investment. India has traditionally run a trade deficit, financed by remittances of non-resident Indians (NRIs) and investment abroad. That continues, there is no likelihood of an improved balance of payments (BoP) stimulating growth.
Investment, as I said earlier, is in dumps. Indian businessmen have neither the funds nor the optimism to make fresh investments. And the fisc? One could do a great deal with the Budget. But the present government does not know macroeconomics, and its Budgets have not addressed the economic slump.
One could, at this point, go into giving a sermon to the government telling it how to stimulate the economy and raise the growth rate. But, in my view, it would be waste of time. Intelligent macroeconomic policy has little hope.
That leaves only a lucky accident to stimulate the economy — like Malayalis going to West Asia booming when the Arabs quadrupled oil prices in the 1970s, or techies going to the US in the 1980s to write information technology (IT) programmes. Such a lucky accident may happen at any time. But it is fundamentally unpredictable.
Do Numbers Lie?
What is more predictable is that the ruling party at the Centre has no competition, and may be in power for years, with its lack of reasoned macroeconomic policy. If that sounds depressing, let us remember that irrespective of the state of the economy, the official growth rate of GDP has continued to hover around 7%.
We can always allow it to cheer us up. And if the slump lasts, cars, motorcycles and other consumer durables will get cheaper. There may even be a crisis in real estate and house prices may collapse. Let us wait for that day. Then we can buy all the symbols of riches and feel good. That is, if we can keep our jobs till then, and earn enough to live well.
(The writer is former chief economist, ministry of finance, GoI)