Re­al­ity check on growth rate

Business Standard - - OPINION - RAHUL KHULLAR

Many, in­clud­ing this pa­per ( Week­end Ru­mi­na­tions Novem­ber 4), be­lieve that the sec­ond quar­ter on­wards the growth rate will re­bound. The num­bers will bring more cheer, es­pe­cially to the govern­ment. But, what if the sec­ond quar­ter growth is not that good? Do the “whin­ers” re­joice while the “shin­ers” go into a sulk? Do we re­ally need to pin so much hope on a num­ber (or num­bers)? Af­ter all, how re­li­able is the ini­tial growth es­ti­mate as an in­di­ca­tor of eco­nomic health?

The nub of the mat­ter is how we ar­rive at that growth num­ber. How and when are es­ti­mates of the per­for­mance of the in­for­mal and non­cor­po­rate sec­tors counted? Now, in the ini­tial es­ti­mates, the only parts of the non-cor­po­rate sec­tor that are cov­ered rea­son­ably well are: Agri­cul­ture, con­struc­tion and re­tail trade. As for the rest, their es­ti­mates are based on ex­trap­o­la­tion of cor­po­rate data. For some man­u­fac­tur­ing sec­tors, the data be­comes avail­able af­ter 18 months. For other sec­tors, we have to wait for the NSS sur­veys of the non-cor­po­rate sec­tor. (I am grate­ful to my friend of 48 years, Pronab Sen, for this in­for­ma­tion).

There are two im­pli­ca­tions. First, the ini­tial es­ti­mates will al­ways be sub­ject to re­vi­sion with a lag. That is, the growth num­ber can be re­vised up­wards or down­wards. And, we will know the “truth” much later. Sec­ond, ex­trap­o­la­tion of cor­po­rate data is fine when the cor­re­la­tion is pos­i­tive. What if the cor­re­la­tion is neg­a­tive? That is, if it is known that the non­cor­po­rate and in­for­mal sec­tors are do­ing worse than the cor­po­rate sec­tor, then any ex­trap­o­la­tion with cor­po­rate data will yield in­flated growth es­ti­mates.

The dou­ble whammy of de­mon­eti­sa­tion and the goods and ser­vices tax (GST) wreaked havoc on the in­for­mal sec­tor and mi­cro, small and medium en­ter­prises (MSMEs). The cor­po­rate sec­tor was not im­pacted as badly. Its health is, there­fore, not a good in­di­ca­tor of what is hap­pen­ing else­where. Es­ti­mates of growth for the in­for­mal/non-cor­po­rate sec­tor based on ex­trap­o­la­tion will not cap­ture the ground po­si­tion.

So, while the ini­tial es­ti­mates may be a pointer to a nascent re­cov­ery in growth, or worse, an in­di­ca­tion that things have not got bet­ter, it seems fu­tile to ex­pend sound and fury on the num­bers.

Doesn’t it make sense to move on be­yond a heated dis­cus­sion on the growth num­bers? As Man­mo­han Singh re­cently said, “There come cer­tain mo­ments in a democ­racy’s his­tory when eco­nom­ics should take prece­dence over pol­i­tics. It is one such mo­ment in India now. We must put the na­tion above all pol­i­tics.”

The largest re­spon­si­bil­ity re­poses in the govern­ment as it has the ex­ec­u­tive pow­ers to do some­thing; the Op­po­si­tion has none. No one ex­pects the govern­ment to pub­licly con­cede pol­icy mis­takes. But it can shed de­nial; and, stop the point-win­ning de­bat­ing style to the for­mu­la­tion of pub­lic pol­icy. Quite sim­ply, we (India) have a prob­lem and it is the elected govern­ment’s job to fix it.

Here are some sug­ges­tions. First, an­nounce a 3 per cent in­ter­est sub­ven­tion on all in­vest­ments made in the MSME sec­tor be­tween, say, De­cem­ber 1, 2017 and March 31, 2019. El­i­gi­bil­ity would be con­tin­gent on at least 50 per cent of the loan be­ing drawn down be­fore the clo­sure date. If this trig­gers in­vest­ment of ~1 lakh crore, the fis­cal cost would be ~20,000 crore spread out over 5-7 years. Start the in­vest­ment cy­cle with those hurt­ing the most; good eco­nom­ics is also good pol­i­tics.

Sec­ond, re­duce the min­i­mum al­ter­nate tax (MAT) in spe­cial eco­nomic zones (SEZs) to zero. Not pos­si­ble; fine, re­duce the MAT to 25 per cent of that in the do­mes­tic tariff area. This will spur in­fra­struc­ture in­vest­ments by SEZ de­vel­op­ers. It will also re­sult in new in­vest­ment by SEZ units (ac­tual pro­duc­ers and ex­porters). Within a year, this will pro­vide a boost to ex­ports. Tax of­fi­cials will ar­gue against this move on the ba­sis of pre­sump­tive rev­enue losses. But if the ac­tiv­ity did not take place to be­gin with, the rev­enue loss is no­tional. Mr. Jait­ley (fi­nance min­is­ter), please do not heed your tax of­fi­cials. In par­tic­u­lar, do not heed the editorials in the pink pages that will ser­monise about how this is a ret­ro­grade mea­sure. Like the ad, just do it.

Third, we need to boost broad-based ru­ral de­mand. Terms of trade have turned against agri­cul­ture over the past few years. Im­me­di­ately in­crease ex­pen­di­ture on ru­ral roads (a ma­jor in­come/em­ploy­ment mul­ti­plier), ru­ral in­fra­struc­ture (water stor­age), and ru­ral hous­ing (as ar­gued in this pa­per two years ago, Novem­ber 3, 2015). Dou­bling out­lays would cost a mea­gre ~20,000 crore.

Fourth, the high­way pro­gramme an­nounced is wel­come but short on de­tails. Parts even strain cred­i­bil­ity e.g the Na­tional High­ways Au­thor­ity of India (NHAI) to mo­bilise ~5-6 lakh crore to fi­nance the con­struc­tion. Re­al­ity check: That is roughly the amount that the govern­ment bor­rows in a year to meet the fis­cal deficit. Re­lease a list of roads (with com­mit­ted fund­ing) that will be built (work started) be­tween now and March 31, 2019. Some must be toll roads (short and long seg­ments). This is nec­es­sary if high­way fund­ing has to move out­side of bud­getary grants. Lastly, an­nounce a mod­est first tranche of bonds.

Fi­nally, what is be­yond the govern­ment’s con­trol: In­ter­est rates. Most econ­o­mists out­side the govern­ment agree that the in­ter­est rate needs to be re­duced. Now, the Re­serve Bank of India (RBI) did not emerge from de­mon­eti­sa­tion smelling of roses. But, it would be folly to at­tempt restor­ing rep­u­ta­tion by assert­ing “in­de­pen­dence” and not budg­ing on in­ter­est rates. What we need is a 100 ba­sis points (bps) re­duc­tion in two short steps of 50 bps each. And now.

The ini­tial es­ti­mates for growth in the sec­ond quar­ter 2017-18 will be an­nounced on Novem­ber 30. Do we wait with bated breath for the num­bers and start another round of po­lit­i­cal point scor­ing? Or, do we start right now to fix the prob­lem in­stead of talk­ing about it? The choice is ours.

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