Dicey state of the economy

Speaking at the Global Business Summit, Prime Minister Narendra Modi said his government had provided a corruption-free environment in the last 4-and-half years. He also mentioned that large numbers of IITs and IIMs had been established, there has been a huge expansion of rural electrification, plans are afoot to land an Indian mission on the Mars, the small farmers are being given a basic income of Rs 500 per month, and there has been a huge thrust on developing solar energy. These gains are tangible and the Prime Minister must be congratulated for the same.

The Prime Minister’s description of the economy, however, stands on a different footing. He said that India’s ranking on the Ease of Doing Business Index had risen from 142 to 77, which is indeed a remarkable achievement. However, much of this rise is attributable to the enactment of the Bankruptcy and Insolvency Code which the Prime Minister himself mentioned elsewhere in the same speech. 

In other words, the improvement in rank is due to the ease of closing business rather than ease of opening business, though both are technically “doing” business. Proof of the slow pace of opening business is available in the lending of the banks. A Reserve Bank of India report says that the growth Gross Bank Credit rose by 9 percent per year during 2016 to 2018, which is fine. However, the share of loans given to industry rose by a meager 0.4 percent per year, and the share of loans given to tourism and computer software rose only by 0.5 percent per year. 

These numbers actually hide a reduction in lending. The amount lent should increase at par with the rate of inflation of about 4 percent. Thus, an increase of 0.5 percent actually indicates a reduction of 3.5 percent after taking inflation into account. The increase in bank lending was driven by trade and personal loans. Therefore, the improvement in the Ease of Doing Business is not leading to opening of businesses; rather it is leading to ease of closing productive businesses.

The Prime Minister said that his government was “pro-growth and pro-poor.” The pro-growth achievements of the government can be assessed by looking at the trends in the Gross Domestic Product (GDP), which is the amount of production made in the economy. The growth rate of GDP during the previous UPA government was higher than the present NDA government according to the data published by the Ministry of Finance two years ago. 

Subsequently, the method of calculation was revised and the revised data showed that growth rate during the previous UPA government was lower than the present NDA government. This revision smacks of manipulation. Therefore, let us assume that there has been no credible change in the growth rate during the present NDA government. However, other proxy data are available to assess the correct situation. 

The average monthly GST collection rose from Rs 90,000 crore per month in 2017-18 to Rs 97,000 crore per month in the first nine months of the present year 2018-19. This translates into an 8 percent growth rate. Thus, there has been no tangible improvement in the growth rate. In fact, there is reason to worry. The GST collection was 103,000 crores in April 2018 and declined to 95,000 crores in December 2018. The trend within the present year is negative. Therefore, the present government can hardly be said to be “pro-growth.” 

The situation of job creation is also not very encouraging. The government has not released the official data on employment which again smacks of political manipulation. The Centre for Monitoring Indian Economy, however, has said that the “unemployment rate in India has doubled between July 2017 and April 2018… (it) rose from 3.4% in July 2017 to 6.2% in March 2018.” This suggests that the government has not been “pro-poor.” 

Counterargument is that other measures implemented by the government have been pro-poor even if jobs have not been created. Indeed, welfare measures such as Ujjwala and Mudra initiated by the PM are great; but the key indicator of pro-poor nature of the economy is the creation of jobs. What good is a free Ujjwala gas cylinder if one does not have flour to make a roti? In conclusion, the claim of the Prime Minister that his government was “pro-growth and pro-poor” is doubtful on both counts at the best and should be rejected at the worst.

The Prime Minister said that the investors from all across the world had shown confidence in the Indian economy. He said that “in the last four years, the amount of FDI received in the country was almost equal to what was received in seven years before 2014.” Data given by the official site of the government (community.data.gov.in) gives a different picture. 

The FDI received in the last four years (2014 to 2017) was 137 billion dollars against 170 billion dollars in the seven years before 2014 (2007 to 2013). Yet, it could be said that 137 billion dollars is “almost” equal to 170 billion dollars. Let us not quibble about that. It is clear that the average FDI has increased from 24 billion dollars per year in the seven years before 2014 to 34 billion dollars per year in the last four years. The problem lies in the trend. A report by Economic Times says that FDI grew by 27 percent in 2015, 29 percent in 2016 and mere 9 percent in 2017. 

It is also to be noted that the increase in FDI is not accompanied with an increase in growth rate. The placid growth rate does not give confidence that FDI is coming in torrents. My discussions with businessmen indicate that Indian businesses are selling to foreign entities and remitting their money abroad. In the flow of FDI has increased along with an outflow of domestic capital leaving no net impact on the economy. The increase in FDI is only a change of hats. 

The overall picture is mixed. There has been improvement in corruption, establishment of IITs and IIMs, rural electrification, Indian mission on the Mars, Basic Income to the farmers, and solar energy. However, the core economic indicators of bank lending to productive sectors, GST collections, job creation and FDI are all laggard to say the least.

The Mahabharata says that the king’s situation is like the leather bag used to carry water. The water does not hold if even one of the 100 stitches is loose. The Prime Minister must take heed. The ground reality of a weakening economy will not be repaired by distributing Ujjwala cylinders and landing on the Mars.

Author was formerly Professor of Economics at IIM Bengaluru