Three quarters through, are the economy's 'green shoots' only visible to Arun Jaitley?
Photo Credit: Shailesh Andrade/Reuters
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It’s that time when individuals take stock of the year gone by. But for companies and countries, it’s the financial year from April 1 to March 31 that matters. The data required to judge performance is always incomplete in December and things could get significantly better or worse in the last quarter. However, even with only three quarters completed, the main trends are rather discernible.

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% from its mid-year forecast of 8.1%-8.5% made in February. With a full quarter to go, and no new credible government impetus possible, it looks like even 7% may be a bridge too far.

We must not forget that these Gross Domestic Product numbers have an inbuilt padding. The GDP growth rate was tweaked a bit in February to put India on a higher trajectory, by giving itself an added 2.2% as a bonus by resorting to some statistical trickery. The earlier 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 the better method – 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 decent 6.9%, instead of the dismal 4.7% calculated then. The current year-end projection means that even a full two years after Manmohan Singh demitted the Prime Minister’s office, the GDP has grown a mere 0.5%. We have had an overload of announcements and pronouncements by the prime minister; the results remind me of the Spanish proverb “the mountain laboured and brought forth a mouse.” Take out the bonus of 2.2% and you have a more plausible growth of 5.2%, which is in line with the original International Monetary Fund forecast.

The slow lane

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% in the past several years and corporate profitability was in that range too. The inflation rate is reduced from nominal GDP growth rate to calculate the real GDP growth rate. Since Indian inflation used to be in the range of 4%-8% in the past, the real GDP growth rate used to be in range of 6%-9%.

In the budget for 2015-’16, Union Finance Minister Arun Jaitley set a nominal GDP growth target of 11.5%.  But the GDP growth of 7.4% that he is crowing about is the real GDP growth. 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%. This means the nominal GDP growth is 5.2% and that the government is 6.3% off the target.

Recently, Jaitley optimistically said that he can now see “green shoots”. Green shoots is a new-age term favoured by bullish merchant bankers to describe signs of economic recovery or positive data during an economic downturn. The term green shoots is a reference to plant growth and recovery, and has been used during down economies to describe signs of similar growth. December is a month when green shoots are hardly ever seen in nature. And most of us who keep looking at the economy can’t see any of the green shoots that only seem visible to Arun Jaitley.

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 – industries, manufacturing, mining, electricity, construction and other infrastructure – as compared to April–September 2014-’15, growth for 2015-’16 have perceptibly moved into the slow lane. Credit offtake growth for manufacturing has fallen from 21% to 7.1%. Construction sector offtake has slowed down from 27.4% to 4.1%. Mining credit offtake has fallen from 17.1% to a negative 8.2%. Only electricity credit offtake has just about held course, dropping from 13.7% to 12.7%. Industries credit offtake has also perceptibly slowed down from 9.6% to 5.2%.

Not surprisingly then, capital expenditure has slowed down to a crawl. Kotak Institutional Securities, which analysed capital expenditure plans of 130 large companies, said that capex for the next fiscal (2017) might actually decline by a huge 15%. It declined by 3.9% in 2015, and is predicted to further decline to 4.1%  in 2016. With the private sector becoming skittish, it is for the Union government to take the lead and step up its capital expenditure. But like UPA-2, the National Democratic Alliance chooses to splurge on subsidies, salaries and show, rather than investing in the future.

Suffering sectors

Accompanying the declining trend in capex, the investment in new power plants has also fallen off the table. In 2010, 46 power generation projects were granted transmission connectivity to get hooked on to the national electricity grid. This number is down to just two projects each in 2014 and in the first 11 months of 2015. Both the thermal projects granted connectivity in 2015 are by Public Sector Undertakings, as compared to 35 private projects five years ago. This sharp drop will hurt with huge power shortages when the economy is ready to pick up again. Power plants have long gestation periods and the time to invest in them is when the economy is slow – which is right now. But the government is still in deep slumber.

Any farmer will tell you that the time for credit is when 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. Our Finance Minister, however, is hoping for green shoots without the credit offtake that goes before it. Look what happened to credit to agriculture and allied activities, which increased by just 11.1% in June 2015 as compared to 18.8% in June 2014.

A confluence of hostile weather that hurt agricultural output, high rural consumer inflation, and a fall in seasonal employment of farm and construction labour has squeezed rural demand. One other major man-made factor in this scenario 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 reverse exodus of construction labour from abandoned projects. Between 2003-’04 and 2011-’12, an estimated 3.7 crore people left the farm sector. The resultant labour shortages were reflected in rural wages, which grew by 15%-20% each year. During the past year, rural wages only grew by 6%.

Financing investment

The growth of motorcycle sales, which are considered a bellwether of the rural economy, has now become sluggish. While two-wheeler sales rose by 8.09% to hit 16 lakh in 2015, sales of motorcycles have only grown by 2.5% to 10.7 lakh. Tractor sales fell from 6.3 lakh annually to 5.51 lakh last year.

India’s merchandise exports also contracted for the 12th straight month in November on the back of a weak global recovery. Indian exports fell 24.4% in November, dropping to $20 billion. Exports had also contracted by 17.5% in October. Imports fell sharply by 30% in November to $29.7 billion, led by a fall in both oil and non-oil imports. Almost all categories of imported items, other than pulses, fruits and vegetables and electronic goods, saw a decline in November.

The stock broking firm Motilal Oswal Securities Ltd estimates corporate profit as a percentage of GDP in 2015-’16 may drop to 3.9%, the lowest since 2003-’04. The aggregate profit of Indian firms is likely to be stagnant at around Rs 4 lakh crore. The savings to GDP ratio has been stagnant at about 28%, having fallen from a peak of 38.1% 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 foreign direct investment, not only in industry but even more so in infrastructure expansion and modernisation. Until then, green shoots will be just like shaven grass strewn on a doctored cricket pitch – something that Arun Jaitley is perhaps familiar with from his time as a cricket administrator.