EDITORIALS

Building Castles in the Air

With dodgy GDP numbers, what can one make of the governments annual scrutiny of the economy?

hen a finance minister proves to be untrustworthy as

regards the tax and non-tax revenues that he projects,
the authenticity of the union budget, indeed, the very
sanctity of the exercise must be held in doubt. But when the
gross domestic product (GDP) numbers are dodgy, what then
can one make of the annual official scrutiny of the economy, which
is, anyway, never authentic, merely meant to boost investor
confidence? Just last year, the GDP numbers pointed to stagnation
in the manufacturing sector, but now the fresh numbers contradict all of that. What stagnation? There is nothing of the sort;
according to the figures of gross value added at constant (201112)
basic prices, growth of the manufacturing sector was quite
robust, 6.2% in 201213, 5.3% in 201314, and 6.8% in 201415.
But, of course, the Modi effect: with the return of investor
confidence, in expectation of huge capital gains, large net portfolio capital inflows have led to rising asset values, and these
may possibly catalyse a debt-driven increase in private consumption. Not quite, but the new private final consumption
expenditure numbers do point to rising growth rates, from
5.5% in 201213 to 6.2% in 201314, and from there to 7.1% in
201415. But then, the revival of government final consumption
is definitely more impressive, from 1.7% in 201213 to 8.2% in
201314, and then to 10% in 201415.
The rise of gross fixed capital formation is, by contrast, unimpressive: -0.3% in 201213, 3.0% in 201314, and 4.1% in 201415.
And, export growth has plunged downwards, from 7.3% in
201314 to 0.9% in 201415. What then explains the overall
growth momentum, the rise of GDP at constant (201112) market
prices from 5.1% in 201213 to 6.9% in 201314, and to 7.4% in
201415? Predominantly government and private final consumption expenditures, it seems. The Economic Survey, 201415
highlights a fall in the incremental capitaloutput ratio. But
elsewhere, in the Survey itself, with respect to manufacturing
companies, there is a reference to no discernible improvement
in capacity utilisation. Indeed, industrial growth as measured by
the index of industrial production figures is quite unimpressive.
As was the case with the old numbers with the earlier base of
200405, much of the impressive growth of GDP in 201415 is
said to have been triggered by the services sector, which records a

growth rate of 10.6% as per the new GDP numbers. But the GDP
growth numbers for the services sector in the old series were
held in doubt by many a discerning economist. And, even with
the new series of GDP data, within the services sector, the subsector of financing, insurance, real estate and business services
is the leader growth in this sub-sector is 13.7% in 201415 as
compared to 7.9% in 201314. Evidence of the Modi effect? One
cannot be so sure, for the growth of bank credit from the scheduled commercial banks has remained sluggish, even worsening
in 201415 compared to 201314.
What, according to the Survey, is the governments outlook
for 201516? For the authors of the Survey, from a macroeconomic perspective, the worst is clearly behind us. The economy is on its way to achhe din, with an acceleration of growth
in the manufacturing and services sectors, buoyancy in consumption demand, and investment activity slowly picking up.
Going by such official macroeconomic pronouncements, and
the view that there is a political mandate for reform and a
benign external environment, the economy is supposedly at a
historic moment. This is the right time to propel India onto a
double-digit growth trajectory. For now, however, the government expects growth to be around 8.5% in 201516, this assuming
normal monsoons and better prospects in the world economy
that could provide impetus to higher exports for Indian products
and services. Given that it will take a while to sort out the problems confronting the publicprivate partnership mode for infrastructural projects, weak profitability and over-indebtedness of
the private corporate sector, and the deteriorating balance
sheets of the public sector banks (the sum of non-performing
and stressed assets constitute over 12% of their total assets),
public investment is considered the vehicle to complement
private investment in the short term, and crowd it in.
Otherwise, beyond this short term when the government is
expected to increase its capital outlays, the authors of the Survey
are wedded to the prevailing conservative macroeconomic dogma.
They believe that a credible programme of fiscal consolidation
promising lower fiscal deficits over the medium term will itself
lead to lower long-term real interest rates, which, in turn, will
stimulate private investment-led, double-digit economic growth.

march 7, 2015

vol l no 10

EPW

Economic & Political Weekly