“When learning is purposeful, creativity blossoms. When creativity blossoms, thinking emanates. When thinking emanates, knowledge is fully lit. When knowledge is lit, economy flourishes.” – A.P.J. Abdul Kalam from his book the “Indomitable Spirit”. What then would be required for a revival of economy that is in a tailspin? Is it purpose, creativity, thinking or knowledge that is lacking? Haven’t we been hearing, year after year, the media scream that revival of economy is just round the corner? The GDP However, has only been going south. For the year 2015-16 it was 8.1%, followed by 7.62, 7.04, 6.12, 4.2 in the year 2019-20 and predicted to be -10.2% for the year 20-21. How serious are the portends? Does this mean the majority of economists routinely get it all wrong?
The statistics department changed the way it measures GDP, ostensibly to meet the UN standards in 2015, much to the chagrin of many economists. Two things changed in the new series, the base year and the database (DB). Change of base year is often resorted to, due to changing times or due to outlook of the economy. What may not be such a good idea is changing it with retrospective effect or changing the DB itself, when 90% of the economy is in the informal sector. Are UN standards suitable for Indian conditions?
The year 2015 saw the GDP growing at 7.3%, showing an economic recovery from the previous year. The Central Statistics Office GDP numbers, for the four quarters in 2015, sea sawed from 6.7 to 8.4 to 6.5 to 7.5% prompting comments that the economy was stabilising. Between 2014 and 2015, whereas services saw a high of 10.2% having risen from 9.1%, and whereas industry rose from 4.5% to 6.1%, agriculture saw a steep fall from 3.7% to 0.2% offsetting the gains.
Gross fixed capital formation (GFCF), a measure for investment demand in the economy, like building infrastructure, schools, hospitals and investments in plant and machinery, accelerated in 2014-15 to 4.6% compared with the previous year of 3%. Private consumption demand was static at 6.3%. A weak demand was sought to be offset by the RBI when it reduced its policy rate by 25 basis points. Manufacturing and services improved whereas agriculture and exports did not. Lower activity in farm, mining and construction sectors prompted Crisil and Yes Bank Ltd to predict increased stress and seek further RBI intervention. Lack of demand to support growth, lack of strong policy push, lower commodity prices and easing interest rate cycle, led CSO to report slowing down in GDP to 7.1% from 7.5%.
In 2016, GFCF fell to 29.6% of GDP from 32.7% of the previous year which meant further slowdown in economy. However, private consumption remained the mainstay of modest acceleration in real GDP growth, prompting government and RBI to believe that recovery was round the corner. But what everyone missed was the effect of July’s GST and November’s demonetisation on the economy. True enough, India’s economic growth decelerated to 5.7% in the quarter ending June 2017, slowest for the previous three years.
Akin to a morphed Delphi method, a median estimate of 46 economists polled by Bloomberg, predicted the GDP to grow 6.4% in September quarter of 2017. Can polling be a metric for estimating GDP growth is another question that deserves answers. The reasons for the recovery cited were a rise in industrial production and exports, restocking by businesses after the transition to GST and major festivals. Principle was to boost demand. The net GDP was expected to hover around 7%, in 2017, driven by a rise in production and demand buoyed by a stable government.
Into a new year, the headlines now were “Everyone is sure India’s economy is in recovery” and “Worst was behind us”. What no one was sure was what was it recovering from, for neither global downturn nor massive devastation or floods were there. What spooked were highly indebted companies and banks holding stressed assets. The double whammy, demonetisation and imperfect roll out of GST broke the proverbial camel’s back, affecting everything from economic output to credit growth. RBI’s intervention did not absorb the shock. The GDP that dropped to 6.12% in the fiscal 2018-19, was spared further embarrassment by a good monsoon.
Come October 2019 and the Media again proclaimed, “Worst may be over, On Economic Numbers”. The optimism may have been borne out of an expected revival in the Auto markets and a bumper harvest. Auto and construction Industries directly or indirectly, support thousands of MSME’s. They could boost a flagging economy only when complemented by an equivalent demand. This time round, the GDP went further slid to 4.2%. What went wrong? Contrary to expectations, India’s real estate, automobile, construction sectors and overall consumption demand witnessed sharp and constant decline. Optimism is a force multiplier. RBI again intervened. The government intervened with more reforms. The tagline once again was “The economy is on the verge of recovery”.
Come 2020, an eminently forgettable year with the pandemic playing out a dance of death and mayhem. The economy went steeply down, what with the IMF estimating a contraction that could reach -10.3%. Several Jobs were lost and businesses closed. Migrant labour was left high and dry. Yet, the finance ministry in its monthly economic outlook for August released Friday, Sep 4, 2020, said “The worst is over for the Indian economy and it is on path of a V-shaped economic recovery. Is this clairvoyance or a hope that nothing worse could happen? One wonders, what the headlines would be in 2021?
Optimism must meet pragmatic initiatives hitting the ground. One hopes we are not running to be where we are. Economy must be revived. The adage that “If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidise it” will not work anymore. Centralisation of all power and decision-making will only lead to more self-goals. The states must be prodded to go alone, innovate, set targets and raise the bar on all three sectors, primary that depends on produce from earth, secondary that depends on manufacturing and construction and tertiary that depends on Services at least for the next five years. Adequate provisions must be legislated. The Fourth sector Research and Development must However, be centrally driven aligned with Industry, Education and societal needs. That done, there will be no looking back.