New Delhi: As reported in a daily newspaper, at an SBI organised conference of banks held last Sunday, the current Governor of the Reserve Bank of India pontificated that it is “uncertain how long it will take for demand conditions to normalise”. Is this called confidence building or green shoots?
By “uncertain” he meant “a string of uncertainties—from supply chains, state of banks, demand, to the pandemic effects on future growth”. In simple English, he meant to say that the government is clueless.
Since 2015, I have written several times (even while the GDP on a statistically upgraded base year price index grew at 8%) to predict that a tailspin had begun due to the clueless economic policy of the Ministry of Finance. I was proved right thereafter, since year after year the GDP growth rate kept declining. In February this year, before the coronavirus pandemic was detected in India, the GDP growth rate had fallen to just 3.0%—even less than the rate of growth of 3.5%, mockingly referred to as the Hindu rate of growth [when we were proudly peddling a 1930s Soviet socialist economic planning]. Officially, Covid-19 arrived thereafter, and it was announced on 25 March by Prime Minister Narendra Modi.
Many columnists wrote that the government may be able to “cover up” the economic and financial slide-down from April 2015 to March 2020 and blame the coronavirus for our lack of GDP growth. Now with the lockdown being diluted, the Finance Ministry has begun propagating that “green shoots of growth” spin. Even the PM was persuaded to join in on that. But the economic graph does not show anything like that. So the conviction based on statistical evidence is that if at all the shoots exist, they are brown in colour, not green.
Earlier in May 2019 after BJP was re-elected to power, the re-elected Prime Minister stated that India’s GDP will double by 2024 to $5 trillion. He was not told by MoF that it meant that GDP will have to grow at 14.4% per year. Considering that around that time the GDP growth rate had declined to 3.4% per year, what miracle would the government have to perform to make it rise immediately from 3.4% rate to 14.4% per year and keep up that feat in every year for five continuous years till 2024?
What is most embarrassing for the Government today is that the Department of Economic Affairs of the Ministry of Finance has done an “et tu Brute” act by publishing on 30 June a document titled Macroeconomic Report [June 2020] in which data published contradict the above spin! The spin thus has boomeranged.
I give a few examples below, which are like a doctor telling his patient the truth but softening the blow by telling him that his body temperature has declined from 40.1 Centigrade to 39.8 Centigrade, so he is becoming healthier. But since then the temperature has risen. The following are the spins and truths in the said document.
Spin 1: Consumption of petroleum products increased by 47% from 99.37 lakh metric tonnes in April to 146.46 lakh metric tonnes in May, thus moderating its year-on-year (y-o-y) contraction from (-)45.8% to (-)23.2% across the two months.
Spin 2: Latest data indicates Kharif sowing at a 104.3% higher than previous year’s acreage with Rabi procurement in full flow in respect of oilseeds, pulses and wheat, benefiting from the bumper harvest.
Spin3: Electricity consumption saw the lowering of the growth rates from (-)24% in April to (-)15.2% in May to (-)11.3% in June.
Spin 4: Sustaining the momentum in economic activity, railway freight traffic improved by 26% in May (8.26 crore tonnes) over that in April 2020 (6.54 crore tonnes). Pray, freight carrying what?
Spin 5: In support, India’s forex reserves at USD 505.6 billion as on 19 June, continued to provide a crucial cushion to external shocks on the back of higher FDI, portfolio flows and low oil prices. Was that our achievement by new policies? Actually FDI and portfolio in India are largely “round tripping” and the forex reserves rose because exports declined faster than imports.
Spin 6: Government was able to correctly anticipate the economic downturn following the outbreak of the pandemic.
Spin 7: Government of India on its part executed a “well laid out” strategy wherein it imposed lockdown to allow states to ramp-up their health and testing infrastructure while implementing.
Spin 8: The next step was to convert the pandemic situation into an opportunity of taking the economy to newer heights. These reforms will create a more competitive and vibrant agricultural sector, bringing prosperity to majority of the population in rural areas and contributing to the growth of the Indian economy in the long term.
Spin 9: Economic growth of pre-Covid times, as and when restored through fuller unlocking of the economy, will heavily lean on the reforms undertaken today to enhance its potential tomorrow.
After digesting these spins are we ready to listen to some truths in the document?
Truth 1: Prior to Covid-19, IIP declined by a record 55.5% in April 2020. The record contraction in April was more than three times as compared to a (-)18.3% growth in March, with several firms reporting nil production. Post Covid de-growth was uniform across all use-based categories, demonstrating the severity of the lockdown induced supply shock.
Truth 2: Eight Core Industries also registered sharply negative (-)38.1% growth in April 2020 as compared to 5.2% in April 2019. All eight industries experienced a broad-based decline with the sharpest contractions in cement [(-)86%)] and steel [(-)83.9%]. Contraction in eight core industries, however, moderated in May to (-)23.4% with fertilizer production increasing by 7.5% in May 2020 over May 2019.
Truth 3: Contraction in industrial output in April 2020 can be attributed the most to basic metals, petroleum products, chemicals, motor vehicles and machinery production. In the manufacturing sector, 12 sub-sectors contributed to approximately 40% of contraction in industrial output. These are motor vehicles, furniture, machinery, electrical equipment, computers and electronics, fabricated metal products, wood, paper, leather, textiles, readymade garments, and beverages and tobacco. Sectors like motor vehicles, machinery and fabricated metal products are seen to be consistently negative contributors to industrial growth both in pre and post Covid months.
Truth 4: Falling production of capital goods, and infrastructure and construction goods (20% contribution to de-growth) also indicated a slump in investment demand.
Truth 5: Purchasing Managers Index (PMI) manufacturing for April 2020 also recorded its sharpest deterioration to 27.4, spread across all components. PMI services also plunged to an all-time low of 5.4.
Truth 6: The production of consumer durables fell by a sharp 95.7% (y-o-y) in April 2020, after declining by 36.5% in March. According to RBI’s Consumer Confidence survey, consumer sentiment sank in May 2020, with the current situation index (CSI) touching a historic low of 63.7 and the one year ahead future expectations index (FEI) also recording a sharp fall of 17.3 units to reach 97.9.
Truth 7: With the forecast of a normal monsoon at 102% of Long period Average (LPA), agriculture is set to cushion the shock of the Covid pandemic on the Indian economy in 2020-21.
Truth 8: After recording an abysmal y-o-y fall of 60.2% in April 2020, India’s merchandise exports contracted by a lower 36.5% in May. Garment industry exports have suffered in both pre and post Covid-19 scenarios, exports of electronic goods have consistently deteriorated since February, possibly reflecting an additional trade impact of the earlier China coronavirus outbreak.
Truth 9: India’s real GDP growth rate was 4.2% in 2019-20 as per the provisional estimates released by the National Statistical Office, compared to 6.1% recorded in previous year. Nominal GDP for the year is estimated at Rs. 203.4 lakh crore, lower as compared to the Budget Estimates. This may be attributed to lower growth in Q4 of 2019-20 due to the global spread of Covid-19 since January 2020.
Truth 10: Real GDP growth rate in Q4 of 2019-20 was at 3.1%, a 2.6 percentage point drop from growth rate in 2018-19. Overall inflation as measured by the GDP deflator for 2019-20 works out at 2.9%, lower than 4.6% in 2018-19. The growth of real Gross Value Added (GVA) at basic prices was at 3.9% in 2019-20, as compared to 6.0% in 2018-19. Real GVA growth has declined in almost all sectors except agriculture and allied; mining and quarrying; and public administration, defence and other services in 2019-20.0
SO WHERE ARE THE GREEN SHOOTS?
According to the document, green shoots [GS] of economic revival have emerged in May and June in four areas.
GS 1: Electricity consumption saw lower contraction in growth rates from (-)24% in April to (-)15.2% in May to (-)11.3% in June (till 28 June). In June, electricity consumption has continuously improved with year on year contraction declining from (-)15.6% in the first half of June to (-)7% in the second half of June (as on 28 June).
GS 2: Total assessable value of e-way bills picked up by a massive 130% in May 2020, though lower than previous year and pre-lockdown levels. Value of e-way bills generated between 1 and 28 June stood at Rs. 11.4 lakh crore.
GS 3: Year-on-year contraction in consumption growth of petroleum products was much smaller at (-)23.2% in May as against (-)45.7% in April. Something to celebrate as green shoots?
GS 4: Railway freight traffic improved by 26% in May (8.26 crore tonnes) over April (6.54 crore tonnes), though still lower than previous year levels.
Conclusion: It is better to shoot green than expect green shoots.
Dr Subramanian Swamy is an MP nominated by the President for his eminence as an economist. He is a former Union Cabinet Minister for Commerce and Law & Justice.