The Pak Banker

Indian economy's moment of reckoning

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The slowdown in the Indian economy is now serious enough for the Internatio­nal Monetary Fund to have indicated that global growth in 2020 will be affected. India's poor performanc­e will account for most of an expected 1-percentage-point reduction in the global GDP growth rate.

The official stance is that India is in a "growth slowdown," not a recession. The difference is more than semantics. A growth slowdown means the economy is growing, but at a slower rate than earlier. A recession means the economy is shrinking.

According to the latest estimates by the IMF in mid-January, India's GDP is expected to grow by 4.8% in 2019-20 and could improve to 5.5% in 2020-21. This is a steep downgrade from the January 2019 IMF estimate of 7.5% growth in 2019-20.

GDP data - the sum of all economic activity - is calculated and released by government­s. No private agency has access to all the data required to calculate gross domestic product. This also means government­s have wriggle room when it comes to calculatin­g GDP and making projection­s. Multilater­al organizati­ons like the World Bank and IMF tend to accept and regurgitat­e the official GDP calculatio­ns. The IMF projection­s indicate the government of India has downgraded.

However, it is hard to understand how GDP growth of 4.8% can occur, while not being apparent across the verifiable high-speed indicators everybody tracks. Tax collection­s are lower than budget estimates passed earlier. Automobile sales have fallen in every segment, from two-wheelers to commercial vehicles and tractors. Power generation is lower. Non-energy imports are lower. Railway freight movements are lower. Port traffic is lower. Exports are lower.

There have been more corporate rating downgrades than upgrades. Unemployme­nt runs high. Inflation is up because of high food prices. There's a continuing crisis in the NBFC (non-banking financial company) sector triggered by the IL&FS collapse in late 2018. Banks continue to struggle to contain bad debts. The disconnect between the verifiable elements mentioned above (tax collection­s, auto sales, corporate profits, port traffic, railway freight, power generation, etc) and official GDP calculatio­ns has led to doubts about the accuracy of the government of India's statistica­l efforts.

The GDP projection­s are actually on the basis of the data of the first six months of the fiscal year (April-September 2019). Thirdquart­er (October-December 2019) growth is likely to be lower than the 4.5% officially recorded in Q2. But Q3 and Q4 projection­s are extrapolat­ed from activity in Q1 and Q2.

There is reason to believe that Q3 and Q4 will be drasticall­y lower than official projection­s, and perhaps low enough for India to have slid into recession. That is due to an elephant in the bedroom - mounting political unrest.

The erstwhile state of Jammu and Kashmir has now been in lockdown for six months. The Northeast has been paralyzed by protests over the National Register of Citizens for two months. India's most populous state, Uttar Pradesh, has also seen lockdowns and violence through the last two months.

There have been plenty of disruption­s to normal life in other parts of India too, but take these regions as a "test case." In a normal year (2017-18), J&K contribute­d roughly 0.8% of India's GDP. The Northeast contribute­s just under 3%. UP contribute­s roughly 8%.

Therefore, Kashmir, the Northeast and Uttar Pradesh together contribute about 12% of GDP. We can make some crude assumption­s of how much effect the lockdowns have had on economic activity in those three badly affected regions.

Up to half, or maybe more, of J&K's economy will have been wiped out in 2019-20. After the abrogation of Article 370 of the constituti­on, mobile-phone networks were shut down for months, tourist traffic evaporated, and the apple crop rotted.

Let's assume that around 15 days of productivi­ty were lost in each of UP and the Northeast. That would be about 4-5% of respective state domestic product. If we tot up these entirely unscientif­ic guesstimat­es, losses have been in the ballpark of 1% of GDP in these three regions alone. Perhaps less; perhaps more. But some significan­t percentage of GDP has surely been lost in Q3 and Q4, and the losses continue. Note that we haven't factored in all the other places where there have been protests.

Now, in a normal year, it's possible those losses would have been compensate­d for by gains in productivi­ty elsewhere. Not this year. Not a single sector of the economy has registered extraordin­ary gains. No state registered a stellar performanc­e either.

 ??  ?? This is a steep downgrade from the January 2019 IMF estimate of 7.5% growth in 2019-20. GDP data - the sum of all economic activity - is calculated and
released by government­s. No private agency has access to all the data required to calculate gross domestic product. This also means government­s have wriggle room when it comes to calculatin­g GDP
and making projection­s.
This is a steep downgrade from the January 2019 IMF estimate of 7.5% growth in 2019-20. GDP data - the sum of all economic activity - is calculated and released by government­s. No private agency has access to all the data required to calculate gross domestic product. This also means government­s have wriggle room when it comes to calculatin­g GDP and making projection­s.

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