- Is India facing a similar situation at present?
- Low Investments
- Impact of recent announcements
- Source of Problem
Why India’s growth figures are off the mark
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- The International Monetary Fund (IMF) and financial sector experts continued to predict till October 2008 that the global economy would grow rather than shrink.
- However, they were wrong since the global economy was rapidly slipping into a great recession.
Is India facing a similar situation at present?
- In India, the economic growth rate (quarterly) has been sliding for the last five quarters. Yet, experts have been have arguing that the rate would rise.
- As per the Economic Survey, the growth rate is 7% for the current year. The RBI also talked of a slowdown to 6.9%, from the 7% predicted in June 2019.
- The Asian Development Bank cut its growth forecast from 7.2% to 7% in April 2019. Similarly, International Monetary Fund (IMF) cut its forecast from 7.3% to 7%.
- The reason for these agencies to largely deviate from the true growth rate is that they are not independent data gathering agencies and depend on official data. So, if official data is erroneous, their projections would also turn out to be incorrect.
- Currently, the Indian economy is growing at 5 or 6% which is historically a good rate of growth. However, investment rate is not rising and consumption in the economy is stagnant. This might show that the rate of growth is much less than 5%.
- In 2018, the RBI cut the interest rates by a total of more than 1%, however, the investment rate has not changed.
- The investment rate is around 30% for the last several years because the capacity utilisation in the economy has been around 75%.
- Unless this rises, fresh investment will result in even lower capacity utilisation and lower profitability since capital will be underutilized.
Impact of recent announcements
- Now, Experts in the Economic Advisory Council to the Prime Minister, in NITI Aayog and the RBI have admitted that there is a slowdown.
- Hence, the Ministry of Finance recently announced major interventions to boost economy. Unfortunately, none of these announcements will lead to a recovery.
- Announcement of PSU Bank mergers will have little impact on the slowing economy. It may only further alter a major portion of the banking system in the coming year, which is not good for a slowing economy.
- Moreover, the government announced bank merger just an hour before the latest data on economy showing slowdown was to be announced. This might show that government wanted to divert attention from the data to be released.
- The package for the automobile sector or making banks pass on interest rate cuts to businesses, will also have little impact.
- The announcement of a transfer of ₹1.76 lakh crore from the RBI to the government will only cover the shortfall expected in revenue and allow the government to maintain the fiscal deficit target at 3.3%. However, this will not provide the needed stimulus.
Source of Problem
- The source of the problem is in the unorganised sector which has been in decline since demonetisation and was further affected by the Goods and Services Tax.
- This sector producing 45% of the output and employing 94% of the workforce, has been in decline, which is pulling down the rate of growth of the economy.
- However, this declining growth was not shown in the recent economic data released by government. The reason is that the data for this sector is collected once in five years (called reference years).
- In between the reference years, the data is only projected on various assumptions.
- For estimating quarterly growth, government uses latest estimates of Agricultural Production, Index of Industrial Production (IIP) and performance of key sectors like, Railways, Transport other than Railways, Banking, Insurance and Government Revenue Expenditure.
- For the annual estimates for mining, banking, restaurants, construction, steel, glass, etc., data from organized industry are used.
- Thus, government assumed that the organised sector can represent the unorganised sector. However, with the economy slowing down over the last three years which adversely impacted the unorganised sector, this assumption does not hold true.
- The government’s economic data only represents the organised sector. To incorporate the unorganised sector, data from alternative sources need to be used.
- The decline in the workforce, the rise in the demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act, etc. suggests that the unorganised sector has declined by at least 10%. If this is taken into account, the current rate of growth is much less than 5%.
- Hence, Government should reveal the rate of growth of the unorganised sector that it is using in its estimates.