Daily Editorial Update – With investments comatose and exports low, any recovery is statistical, not economic
Hello and welcome to exampundit. Here is today’s Editorial from the favorite Economic Times titled “With investments comatose and exports low, any recovery is statistical, not economic”.
Today’s Topic: With investments comatose and exports low, any recovery is statistical, not economic
The real issue with the recent near-7% GDP growth figure isn’t that it should have been 6.7% or 6.5% to correctly account for last year’s note ban. The real issue is that it is almost entirely driven by consumption. Investments have been comatose for the past several years. Investments worth over $220 billion remain stuck in the pipeline. Exports have only recently started recovering after two years of massive contraction.
Which means that any further shock to consumption — be it a monsoon mood swing or a sudden rise in food and commodity prices — has the potential to slow down the economy. And the engines of investments and exports will be in no position to offer any significant backup.
The government will be forced to step in by increasing short-term revenue expenditure, cutting down on longer term public investment, and throwing years of fiscal consolidation efforts to the air. Meanwhile, the absence of fiscal space will only make things worse for private investment and the ailing banking sector, which at this point is pining for a bailout.
Other imbalances will also play in the background. Fiscal slippage will almost certainly be frowned upon by global credit-rating agencies. Overt reliance on consumption without adequate capital spending can potentially overheat the economy, increase the risk of inflation and subsequently promote a high interest rate regime.
Increased consumption is also accompanied by increasing imports, otherwise a natural economic phenomenon. But in the event of a seismic shock, it can put pressure on the current account deficit and the rupee if not backed by exports and foreign capital inflows. A weak rupee makes imported goods more expensive, causing inflation to further rise, and convince RBI to keep tightening monetary policy.
It is not just a Nostradamus-que economic meltdown risk that one should worry about. Some of the best years of the Indian economy — 2000-10 — tell us that simply relying on consumption isn’t enough. In this decade, GDP trend growth sharply swerved up to 9%, while per-capita income jumped by 200%. Not even the 2008 global financial crisis could unnerve the growth momentum. The Sensex grew from 5,000 to 15,000 between 2000 and 2010. In other words, the market capitalisation of the top corporates grew by a whopping 300% in this decade.
In contrast, circa 2017 and the Sensex has grown by only 67% since. GDP growth over the last six years has moderated to an average of around 6.6% from 8.5% in the previous six years. Per-capita income over the last decade has inched up by a mere 15%.
The golden decade of 2000-10 was primarily driven by robust investment and export growth, along with rapid liberalisation and reform. The investment growth rate doubled within those 10 years. A booming global economy and an increasingly active India aligning itself with the global value chains gave a big boost to exports.
It is usually in times of booms that the seeds of bust get planted. The fiscal stimulus following the 2008 financial crisis was supposed to be a temporary support mechanism. Instead, it was conveniently not withdrawn when growth recovered. Subsidies reached a high of 3% of GDP. Minimum support prices for farmers were kept inflated, and profligate social sector schemes led to accelerated growth in wages and personal incomes.
While the average consumer (and government) went on a shopping spree, investments started stalling with problems erupting around environment clearances, land acquisition and allegations of wide-scale corruption.
This led to an effective freeze on bureaucratic decision-making. Reckless borrowing and poor banking governance during the boom years were now leading to mounting non-performing assets (NPAs) and highly indebted corporates struggling to grow their way out of their debts.
Elevated global oil and food prices in an economy that were also overheating from high public and private consumption caused the RBI to tighten monetary policy. Meanwhile, the pace of reforms slowed down, actually reversed, with India making global headlines on its regressive retrospective taxation decisions.
By 2014, India found itself with high fiscal deficit, current account deficit, inflation and interest rates, along with slowing growth, stalled reforms and a plummeting rupee. It was precariously close to being downgraded to junk by global rating agencies.
The last three years have been a rescue from this brink. Improved quality of fiscal consolidation has ensured that GoI is spending less on handouts, and more on investing in capital goods like roads and railways. The fall in oil and commodity prices has given some much needed breathing space, while the pace of reforms has remained brisk. The recent GST coup de grâce is actually the latest in a long list of ‘small bang’ reforms that GoI has been doing for a while now.
Statistically, India’s growth rate should remain fine. Consumption is close to 60% of GDP. If that continues to grow well, and other economic parameters trudge along, we will keep scoring 7% and above. If anything, demonetisation has shown how resilient Indian consumption can remain to shocks.
But the real rot lies in that investments have shrunk from 35% of GDP to below 30%, NPAs remain at an uncomfortable high of 8%, while exports have fallen from 25% to 21%. Till these are corrected, the glory of 2000-10’s superlative economic prosperity will continue to elude India. And the recovery will remain a statistical phenomenon, not an economic one.