Jaitley’s green shoots

It is that time of the year again when we take stock of the year gone by. This is possibly a good point in time for individuals, but not for companies and nations. For them it’s the financial year that matters. Hence, data needed to judge performance is always incomplete in December. Things could get better or worsen by much in the last quarter. But, the main trends are discernable. The most obvious one is that the economy has slowed down considerably. The government has now slashed its full- year economic growth forecast to 7- 7.5 per cent from its forecast of 8.1- 8.5 per cent made in February 2015. With a full quarter to go and no new credible government impetus possible, it looks like even 7 per cent may be a bridge too far.

We must not forget that these gross domestic product ( GDP) numbers have an inbuilt padding in them. The GDP growth rate was tweaked a bit in February to put India on a higher trajectory, giving it an added 2.2 per cent as a bonus by resorting to some statistical legerdemain. The past practice was to compute GDP growth on factor costs. This has now been changed to constant prices to take into account gross value addition in goods and services as well as indirect taxes. Besides, the base year was also shifted to 2011- 12 from the earlier 2004- 05. This may even be a better way, but then even the years before would not look so bad.

By this measure, growth in the last year of the United Progressive Alliance government would have been a goodlooking 6.9 per cent, instead of the dismal 4.7 per cent calculated then. The current year- end projection means that two years after Manmohan Singh demitted office, the GDP has grown a mere 0.5 per cent. We have had a surfeit of announcements and pronouncements by the Prime Minister, but this reminds me of a Spanish proverb — “the mountain laboured and brought forth a mouse.” Take out the bonus of 2.2 per cent and you have a more plausible growth of 5.2 per cent, which is in line with the original International Monetary Fund forecast.

Nominal GDP growth rates are measured at current market prices and corporate profitability also usually grows at that pace. For example, India’s nominal GDP growth used to be in the range of 12- 15 per cent for the past several years and corporate profitability also used to be in that range. The inflation rate is reduced from nominal GDP growth rate to calculate the real GDP growth rate. Since Indian inflation was in the range of 4- 8 per cent in the past, the real GDP growth rate was in the 6- 9 per cent range.

In the Budget for 201516, Union finance minister Arun Jaitley set a nominal GDP growth target of 11.5 per cent. But the GDP growth of 7.4 per cent that he is crowing about is the real GDP. He is comparing apples with oranges. You get real GDP growth after adjusting nominal GDP growth for inflation. But in 2015- 16, we have a deflation of about 2.2 per cent, which means the nominal GDP growth is 5.2 per cent and the government is 6.3 per cent off target.

Recently, Mr Jaitley optimistically said that he can now see “green shoots”. Green shoots is a new- age term favoured by bullish merchant bankers and other flimflam people to describe signs of economic recovery or positive data during an economic downturn. December is a month when green shoots are hardly ever seen in nature. Most of us who keep looking at the economy can’t see any of the green shoots that Mr Jaitley seems to be looking at.

If I were looking for green shoots, the first place to look at would be the growth of credit by scheduled commercial banks. For the six critical sectors, namely, industries, manufacturing, mining, electricity, construction and other infrastructure, as compared to AprilSeptember 2014- 15 and 2015- 16 growth have perceptibly moved into the slow lane. Credit offtake growth for manufacturing has fallen from 21 to 7.1 per cent. Construction sector offtake has slowed down from 27.4 to 4.1 per cent. Mining credit offtake has fallen from 17.1 to a negative 8.2 per cent. Only electricity credit offtake has just about held course by dropping from 13.7 to 12.7 per cent. Industries’ credit offtake has also perceptibly slowed down from 9.6 to 5.2 per cent.

Any farmer will tell you that the time for credit is when one is preparing the land, buying seed, pesticides and fertilisers and investing in equipment. After that he waits for nature to play its role and for green shoots to emerge. Mr Jaitley, however, is hoping for green shoots without the credit offtake that goes before it. While we are on to green shoots, look what happened to credit to agriculture and allied activities. This increased by just 11.1 per cent in June 2015 as compared with an increase of 18.8 per

The growth of 7.4

per cent that Mr Jaitley is crowing about is the real GDP ... but we have a deflation of about 2.2 per cent, which means the the government is 6.3 per cent

off target. cent in June 2014.

A confluence of hostile weather that hurt agricultural output, high rural consumer inflation and fall in seasonal employment as farm and construction labour, has squeezed rural demand. One other major manmade factor is that the present government, in its anxiety to tamp down inflation, did not continue with the trend of higher farm support prices established by the UPA. This added to the woes of the rural sector, which also saw the return exodus of construction labour from abandoned projects.

India’s merchandise exports contracted for the 12th straight month in November on the back of a weak global recovery. Indian exports fell 24.4 per cent in November, dropping to $ 20 billion. Imports fell sharply by 30 per cent in November to $ 29.7 billion, led by a fall in both oil and non- oil imports.

The stock broking firm Motilal Oswal Securities Ltd estimates corporate profit as a percentage of GDP in 2015- 16 may drop to 3.9 per cent, the lowest since 2003- 04. The aggregate profit of Indian firms is likely to be stagnant at around ` 4 lakh crore. The savings to GDP ratio has been stagnant at about 28 per cent, having fallen from a peak of 38.1 per cent in 2008. So where is the money for investment going to come from?

The government needs to summon the political will to step up capital expenditure by trimming subsidies, more efficient, intelligent and diligent taxation, and by attracting more FDI, not only in industry but more so in infrastructure expansion and modernisation. Till then, green shoots will be just like shaven grass strewn on a doctored cricket pitch. Something Union finance minister and Delhi cricket czar Arun Jaitley is very familiar with.

The writer, a policy analyst studying economic

and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.