The Indian economy popped up a shocker yesterday. For the first quarter of the financial year 2019-20 it slowed down to a surprising 5% - well below the street expectation of about 5.6-5.7% which itself would not have been happy. A quick look at current data.
Only two sectors one agriculture and second "Trade, hotel, transport, communication" achieved minor positive growth. Former grew by 2% from a 0.1% and the latter stood at 7.1 up from 6% last quarter . However agriculture at 2% is laughable - given that Government is targeting doubling the farmer income by 2024.
Bad News
This is bad news - 1QFY20 is fifth consecutive quarter of declining GDP growth. The lowest in six years (four quarters). This is the lowest ever under the leadership of PM modi. Before this, the fourth quarter in 2013 saw a meagre growth of 4.3% in the last days of policy paralysis of UPA-II. However, even that comparison may not be valid because this 5% is on new data series and possibly when compared apple to apple the 4.3% of 4QFY13 was probably better.
Not Surprising
While this is bad news it is not a surprise. In many posts earlier too - I have pointed out to the impending slowdown as one after the other industrial sectors signalled severe slowdown. Read my budget analysis here
But that was recent future. I have been pointing out to declining saving rate, lack of consumption demand, stagnant exports, increasing unemployment, sluggish & incremental approach to economic reforms.
Add to them the adventure like demonetisation, incompetent handling of one major reform - the GST, Increased regulatory mindset - moving to more license raaj, killing of autonomy of major institutions, shift towards a higher tariff - higher taxation regime and it is easy to understand why the economy seems to sputtering at all levels.
Lost Opportunities
It would be easy and simplistic to blame Global environment for the slowdown All slowdowns are part cyclical. However we will be fools if we missed the fact that this slowdown is majorly structural and very poorly managed economically.
We faced a much stronger cyclical headwind way back in 2009 with much more finesse. In fact the major reform of introduction and implementation of service tax was multifold better than the implementation of GST.
I have been pointing out that Modi Government has been the luckiest government that India ever had. It saw the longest spell of Moderate to very low oil prices, benign dollar because of slowing down of American Economy, rapidly declining chinese economy, comfortable - even strong majority in the Government, a popular and widely accepted PM.
And yet the Government failed on most major structural reforms that were badly needed - For example it failed to aggressively privatise the public sector, or it failed to boost manufacturing, it dragged its feet on cleaning the Banking NPA mess for far too long, It did nothing to mitigate the impacts of Demonetisation on the real cash economy of India. We may have been climbing the ease of doing business rankings but honestly on the ground doing business is more problematic than ever - with both costs and regulatory hurdles increasing.
On the positive side the implementation of IBC and some infrastructural focus (like roads and cleanliness) are good long term measures and will have positive impact on the economy but very poor short term management is a huge problem.
Wrong Focus
Water tight control on most institutions that should have been autonomous, managing media narrative by muting dissenting voices, obfuscating uncomfortable data to avoid fixing responsibility, living in denial about obvious problems in the economy, and blaming all troubles on past Governments as far back as that of Nehru are some of the attitudes that are beyond understanding from any rational point of view.
Instead the government probably tried to distract attention from economic mess by raising the ante on nationalism, anti-pak rhetoric and some religious/cultural issues. It would be foolhardy however to believe that bread and butter issues will be forgotten for long in the jingoism around Nationalism. Sooner or later economy will have to be center of attention even for the voting public.
Even on policy - the government focussed too much on revenue generation rather than boosting demand by leaving more in the hands of consuming public.
If one studied the rosy GDP growth rate data of Modi 1.0 it was largely due to Government spending - while private consumption largely remained dull and exports & manufacturing listless. The attached graph shows non-Government GDP growth rate. It comes to 4.5% for the last quarter. So we end up moving back to nineties where taxation levels rose, Baburaaj grew - taxmen seems to be knocking at everyone's doors smelling for tax evasion threatening with punitive measures. But startup India, or Make in India languish because of unfriendly policies.
The modi style of Governance focuses on grand gala announcements often not backed up by painstaking implementation - so we had a high pitched promotion of having opened 1.2 crores jan dhan accounts in a day in 2014 but till 2019 the Direct Benefit transfer of subsidies is limited to agricultural and LPG subsidies. While we had a midnight parliament session to launch the GST - but now we are saddled with an unwieldy, poorly thought and implemented tax regime which has choked liquidity, all but killed MSME & SME and has in all probability actually increased costs. The core promise of the GST - invoice matching still remains a mirage. Similarly we had two-three years of international jamboree on "Make in India" but manufacturing in India is gasping for breath and we are losing to other asian economies in grabbing the shift of manufacturing bases from China. I can go on with this list - however suffice it to say that most initiatives lacked on the ground plan to manage teething troubles.
In sum
So here are the structural issues to address in the economy. It is not too late - the Indian economy offers huge opportunities but the Government needs to change its attitude, approach and acceptance. Incremental steps like bank recapitalisation or mergers alone will not help - we need immediate and bold steps to simplify processes, to improve liquidity, to remove interventionist governance.
Let me take two macro examples - The government aims at doubling farm income by 2024 (after having failed at doing so by 2019 earlier). This will require agriculture to grow at more than 14% annually for five years. That is impossible. Alternatively we will need to move the workforce from agriculture to services and manufacturing so that the remaining farmer's incomes double. But rising unemployment and listless manufacturing growth are suggesting that this is also just a grand announcement.
The other example is that the Government wants to reach a $5 trillion economy by 2024. This will require a nominal GDP growth of 12% consistently with a 4% inflation. We are currently at 5% GDP growth and the inflation is close to 4.3% assuming these are not fudged figures.
Will we wake up to economic realities or simply conduct another surgical strike to distract and then will chant - Vande Mataram.
- Gross Value Added (GVA) slowdown to 4.9% from 5.7% last quarter;
- Mining sector slowed down to 2.7% from an already weak 4.2% previous qrtr;Manufacturing slowed to a meagre 0.6 % compared to 3.1% in the last quarter;
- Construction too slowed down to 5.7% from a 7.1%;
- financial services sector witnessed slowing down to 5.9 from 9.5%;
Only two sectors one agriculture and second "Trade, hotel, transport, communication" achieved minor positive growth. Former grew by 2% from a 0.1% and the latter stood at 7.1 up from 6% last quarter . However agriculture at 2% is laughable - given that Government is targeting doubling the farmer income by 2024.
Bad News
This is bad news - 1QFY20 is fifth consecutive quarter of declining GDP growth. The lowest in six years (four quarters). This is the lowest ever under the leadership of PM modi. Before this, the fourth quarter in 2013 saw a meagre growth of 4.3% in the last days of policy paralysis of UPA-II. However, even that comparison may not be valid because this 5% is on new data series and possibly when compared apple to apple the 4.3% of 4QFY13 was probably better.Not Surprising
While this is bad news it is not a surprise. In many posts earlier too - I have pointed out to the impending slowdown as one after the other industrial sectors signalled severe slowdown. Read my budget analysis here
But that was recent future. I have been pointing out to declining saving rate, lack of consumption demand, stagnant exports, increasing unemployment, sluggish & incremental approach to economic reforms.
Add to them the adventure like demonetisation, incompetent handling of one major reform - the GST, Increased regulatory mindset - moving to more license raaj, killing of autonomy of major institutions, shift towards a higher tariff - higher taxation regime and it is easy to understand why the economy seems to sputtering at all levels.
Lost Opportunities
It would be easy and simplistic to blame Global environment for the slowdown All slowdowns are part cyclical. However we will be fools if we missed the fact that this slowdown is majorly structural and very poorly managed economically.
We faced a much stronger cyclical headwind way back in 2009 with much more finesse. In fact the major reform of introduction and implementation of service tax was multifold better than the implementation of GST.
I have been pointing out that Modi Government has been the luckiest government that India ever had. It saw the longest spell of Moderate to very low oil prices, benign dollar because of slowing down of American Economy, rapidly declining chinese economy, comfortable - even strong majority in the Government, a popular and widely accepted PM.
And yet the Government failed on most major structural reforms that were badly needed - For example it failed to aggressively privatise the public sector, or it failed to boost manufacturing, it dragged its feet on cleaning the Banking NPA mess for far too long, It did nothing to mitigate the impacts of Demonetisation on the real cash economy of India. We may have been climbing the ease of doing business rankings but honestly on the ground doing business is more problematic than ever - with both costs and regulatory hurdles increasing.
On the positive side the implementation of IBC and some infrastructural focus (like roads and cleanliness) are good long term measures and will have positive impact on the economy but very poor short term management is a huge problem.
Wrong Focus
Water tight control on most institutions that should have been autonomous, managing media narrative by muting dissenting voices, obfuscating uncomfortable data to avoid fixing responsibility, living in denial about obvious problems in the economy, and blaming all troubles on past Governments as far back as that of Nehru are some of the attitudes that are beyond understanding from any rational point of view.
Instead the government probably tried to distract attention from economic mess by raising the ante on nationalism, anti-pak rhetoric and some religious/cultural issues. It would be foolhardy however to believe that bread and butter issues will be forgotten for long in the jingoism around Nationalism. Sooner or later economy will have to be center of attention even for the voting public.
Even on policy - the government focussed too much on revenue generation rather than boosting demand by leaving more in the hands of consuming public.
The modi style of Governance focuses on grand gala announcements often not backed up by painstaking implementation - so we had a high pitched promotion of having opened 1.2 crores jan dhan accounts in a day in 2014 but till 2019 the Direct Benefit transfer of subsidies is limited to agricultural and LPG subsidies. While we had a midnight parliament session to launch the GST - but now we are saddled with an unwieldy, poorly thought and implemented tax regime which has choked liquidity, all but killed MSME & SME and has in all probability actually increased costs. The core promise of the GST - invoice matching still remains a mirage. Similarly we had two-three years of international jamboree on "Make in India" but manufacturing in India is gasping for breath and we are losing to other asian economies in grabbing the shift of manufacturing bases from China. I can go on with this list - however suffice it to say that most initiatives lacked on the ground plan to manage teething troubles.
In sum
So here are the structural issues to address in the economy. It is not too late - the Indian economy offers huge opportunities but the Government needs to change its attitude, approach and acceptance. Incremental steps like bank recapitalisation or mergers alone will not help - we need immediate and bold steps to simplify processes, to improve liquidity, to remove interventionist governance.
Let me take two macro examples - The government aims at doubling farm income by 2024 (after having failed at doing so by 2019 earlier). This will require agriculture to grow at more than 14% annually for five years. That is impossible. Alternatively we will need to move the workforce from agriculture to services and manufacturing so that the remaining farmer's incomes double. But rising unemployment and listless manufacturing growth are suggesting that this is also just a grand announcement.
The other example is that the Government wants to reach a $5 trillion economy by 2024. This will require a nominal GDP growth of 12% consistently with a 4% inflation. We are currently at 5% GDP growth and the inflation is close to 4.3% assuming these are not fudged figures.
Will we wake up to economic realities or simply conduct another surgical strike to distract and then will chant - Vande Mataram.
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