Growth turnaround story is unconvincing

The economy is doing well, our chief statistician tells us, and we are happy. But to paraphrase Oliver Twist, I could have well said, “Sir, can I have some more?”

The CSO estimates are from a new base, 2011-12. Likewise, the growth rate of the manufacturing sector, as per IIP, shows a substantial pick-up from the earlier estimates ( see table ).

The highest revision upwards was for 2016-17, when the earliest estimate of IIP at 2004-05 prices at minus 0.7 per cent, went up to 4.9 per cent. In the case of national accounts, the current estimates are in 2011-12 prices and past data are not available. The estimates are available from 2014-15.

The growth of gross value added at constant prices of the manufacturing sector was 10.6 per cent in 2015-16 and 7.7 per cent in 2016-17. It was 1.2 per cent in the first quarter of 2017-18, but rebounded to 7 per cent in the second quarter. This compares with the growth of the index of industrial production of 2 per cent and 0.4 per cent, respectively. This discrepancy is truly extraordinary. (Of course, there is also the difference arising out of change of base year within IIP and CSO numbers.)

Assuming for the present that both figures (CSO and IIP) are correct and that one measures output and the other value added, there is indeed a great consistency problem. Even if we assume that the national income figures consist in the main in technological advance leading to value added rising even when the physical output is not rising, the gap is just too large.

Incidentally, in the same period gross capital formation or investment in the economy has collapsed. Gross fixed capital formation as a percentage of GDP which had crossed 32 per cent, fell to 31.8 per cent in 2015-16 and stood at 29.2 per cent in 2016-17.

It has further fallen to 29.4 per cent in the first half of 2017-18. This figure fell in every quarter of 2016-17. It was estimated at 29.7 per cent in the first quarter of 2016-17, falling to 28.9 per cent in the second quarter and was 29.1 per cent in the third quarter. These estimates were in constant prices. The turnaround in the manufacturing economy in terms of physical output and robust investment is not happening. (I remain Oliver Twist.)

It would be useful if economists who advise governments accept this. Since the low growth period of 2012, there has been a repetitive pattern, of being told that a recovery is round the corner, or six months away. The PMI is rising but output and employment is not.

Without making a political issue out of this, let us begin with arguments given by advisers to the UPA government just before it lost the elections. The chairman of the Economic Advisory Council of the Prime Minister, making his analysis of the slowdown, sagely said capitalists were not investing. In addition, he delivered a neat classroom lecture on ‘sources of growth’.

We were not told that public investment fell two years ago by a little less than 2 per cent of GDP, and then corporate investment fell. The entire edifice of PPP infrastructure was punctured.

The differences between the ruling party and the agenda of the official advisers in that period was much too striking to pass over in terms of propaganda. There was a commitment to raising investment levels with a clear statement that a PPP strategy would be followed in a time-bound manner. Despite a view within the party that the national manufacturing policy would work best when supplemented by mild tariff support, accredited advisors made statements to the contrary.

The same sort of inconsistency is on display this time around. The CEA, Niti Aayog vice-chairman and the central bank want the Central deficit to fall with some tightening, and public investment to rise to pull in private investment. The Government says it has already happened and all is hunky dory. Maybe, the finance minister will unveil a fiscal strategy before the Budget in Parliament so that we have a jolly good New Year. Meanwhile, please don’t savage the RBI, for if interest rates fall, the inflow of NRI funds will stop and so will services growth, due to which GDP growth does so much better.

The writer is a former Union minister

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