Aarati Krishnan

Whose mistakes killed the economy?

Aaarati Krishnan | Updated on September 06, 2019 Published on September 05, 2019

Downward trend Nominal GDP was down to 8% in the June quarter. - ISTOCKPHOTO

As four friends discover, there are multiple villains — the UPA, the NDA, India Inc and the RBI — to blame

After the CSO released its latest GDP growth estimates at 5 per cent for the June quarter, four friends decided to investigate who’s responsible for massacring India’s growth.

Yogesh: Sanju, I hope you’ll admit it at least now that the economy’s been going steadily downhill since the UPA’s golden era. The UPA-2 left behind a quarterly GDP growth of 8 per cent and the NDA has successfully levelled it to 5 per cent.

Sanju: You’re kidding me, right? The UPA-2’s economic policies are the root of all our current troubles. The UPA during its two stints averaged a GDP growth of 6.9 per cent. The NDA in the last five years has averaged 7.5 per cent. Look at the evidence, Sherlock!

Yogesh: Watson, I dispute the evidence, I’m not convinced about the GDP back series. Under the old series, the UPA averaged 7.5 per cent from FY04 to FY14. Come on, even going by numbers from listed companies or bank credit growth, the UPA years felt like boom times.

Sanju: Nice that you should mention bank credit. It is bank credit drying up that has hurt the economy. And who’s responsible for this? UPA-1! The economy took off vertically between FY03 and FY08 with the global commodity super-cycle and strong global growth at 3-4 per cent. India’s private sector put up mega steel, power, metal and mining projects and went on a global acquisition spree. With political nudging, banks lent liberally to these projects. Everyone thought the good times would last forever. But they didn’t, right? When the global financial crisis hit, India’s GDP growth crashed to 3.1 per cent. Projects were stalled and banks were left holding the baby. They’re still chipping away at that ₹11-lakh crore mountain of NPAs.

Prashant: Banks also managed to sweep the bloodstains on their balance sheets under the carpet until FY15, by calling them ‘restructured’ assets. But the RBI’s AQR in 2015 got rid of the carpet and the bloodstains were there for all to see.

Minakshi: Yes, bank credit growth galloped seven-fold in the UPA’s 10 years. But they’ve not even doubled in the last five years. Banks have been busy recapitalising. Industrial groups who borrowed are broke and awaiting resolution under the IBC.

Sanju: Wait, I’m not finished. What of the UPA-2’s stimulus in 2008, which took the fiscal deficit close to 6 per cent? Their big MSP increases led to inflation topping 10 per cent. As Indians moved en masse to gold, the Current Account Deficit topped 6.5 per cent in 2012. When the taper tantrum hit us in 2013, the economy was in the ICU.

The GDP argument

Yogesh: Hey, wait a minute Sanju. It looks as if you’re framing it all on your favourite suspect. Let’s not forget the NDA’s mis-steps. They inherited an improving economy, thanks to falling oil and commodity prices. The GDP was in the pink of health between Q3 FY15 and Q2 FY16, with two quarters of 9 per cent growth. But what did the NDA do? It went and gave the economy a nasty whack on the head with its surgical strike on high-value currency. Even as it was still reeling, it brought in the GST.

Prashant: Hey, don’t make GST the villain here; it was a long overdue reform.

Yogesh: Yeah, but can you deny that the way it was implemented, with too many rate slabs, flip-flops and glitchy technology, did take the fizz out of the economy?

Sanju: All this is pure conjecture, Sherlock. Where’s the evidence? The CSO’s GDP estimates show that the economy bounced back pretty quickly from both the note ban and the GST. The GDP growth improved from 6 per cent in Q1 of FY18 to 8 per cent by Q4.

Minakshi: ‘Estimate’ is the operative word here, Sanju. The CSO’s quick/provisional GDP estimates that we all dissect to bits, are based on high-frequency data from India’s corporate sector. But the informal sector, which makes up well over half the economy, doesn’t file any regular performance data with the government. So, when the CSO compiles its quarterly or provisional estimates, it uses corporate data to extrapolate what’s going on in the rest of the economy. So we don’t know yet if small firms sailed through the GST.

Prashant: There’s too much obsession over the real GDP growth. It’s nominal growth that matters to sentiment. The NDA has done much worse than UPA on this score. Nominal GDP growth under the UPA-2 averaged 15 per cent, but just 11 per cent under the NDA-1. In the June quarter, it has crashed to 8 per cent. Apart from the NDA’s laser focus on quelling inflation, global factors are at play here too. Low food inflation has put farm incomes in a downward spiral. Increments haven’t been great for city folks.

Minakshi: I don’t think people realise how much the government has propped up the economy in the last five years. While private consumption and private investments have both grown at only 7-odd per cent, government spending has grown at 9 per cent a year, with the Pay Commission and pension payouts. That’s why, after the government go-slow in the last couple of quarters, the economy’s hurting so much.

Borrowing troubles

Prashant: This investigation is getting completely side-tracked. Why do you people give so much importance to politics? India’s corporate sector is the clear villain here. Who drew up over-ambitious infra projects during boom times? It was India Inc. Who borrowed heavily from banks but couldn’t pay up? The who’s-who of industry. Who siphoned off money from real estate projects and left over one lakh homebuyers hanging? Real estate czars. Who pumped their distributors with too much inventory in 2019 and jammed up working capital? Auto and consumer companies. Now they’re all knocking at the government’s doors for solutions to problems they’ve created.

Sanju: Yes, it’s a mystery how India’s auto or FMCG companies can peddle the same fuel-guzzling SUVs and glucose biscuits for decades and not expect a slowdown! I was just reading that Indian businesses have continued selling to the creamy layer of consumers and have not innovated at all for the bottom of the pyramid.

Minakshi: Ahem… I’d like to add a new suspect to this list — the RBI. If they’d recognised this slowdown early enough and slashed the repo rate to 5.4 per cent a year ago, we’d probably be well on our way to recovery. Now, we may have to wait for 2-3 quarters.

Yogesh: And don’t leave out IL&FS. Being a ‘systemically important NBFC’, they allowed it to get away with murder. Its collapse was the trigger for this NBFC crisis, which has seen borrowing costs shoot up, credit evaporating and promoters scrounging for funds.

Sanju: Next you’ll be blaming me for the slowdown.

Minakshi: Haha, why not? Didn’t you just decide to postpone replacing your car because the economy isn’t great?

Prashant: All this tells me that a turnaround may take a while. Of the three pillars of the economy, consumers are facing slow income growth and seem to be tightening their belts. The private corporate sector seems to be getting rebooted, with the old set of promoters and industries losing their mojo, and new ones yet to emerge. The government has already exploited both on and off-balance sheet borrowings to the hilt and has little room to spend. Perhaps all the suspects can stop pointing fingers at each other and think up some solutions?

Published on September 05, 2019
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