January 11, 2018
Economy: Walking, but not yet running
By Nitin Desai
Has the economy turned around and is the growth process back on track? The government’s statisticians are now projecting a 6.5 per cent growth rate for gross domestic product (GDP) in this fiscal year, lower than the 6.7-7.5 per cent range of the forecasts from the Reserve Bank of India (RBI), the NITI Aayog and the finance ministry. The Central Statistics Office’s (CSO’s) 6.5 per cent forecast is a first Advanced Estimate which will be revised several times in the months ahead, the next revision coming perhaps as early as end-February. The finance ministry and the RBI may yet be proved right. But when the unorganised sector data becomes available, we could also see a downward revision.
Setting the forecast for the year against the figures for the first two quarters (see the table), it is clear that the CSO expects an acceleration that is modest. If the CSO is right in its assessment, then one can say that the economy is on the mend but has not yet generated a momentum strong enough to get to the 8.5 per cent growth rate required for the NITI Aayog’s 15-year vision of tripling per capita income by 2031-32.
The key problem is the stagnation in investment. The current price-investment ratio has fallen over the past 10 quarters from 30.4 per cent in the first quarter of 2015-16 to 26.4 per cent in the second quarter of 2017-18. The CSO expects the ratio for the year as a whole to be the same, which means no improvement in the second half of the year. This squares with the CMIE data on new projects, which shows a sharp decline from Rs 3.9 trillion in the March 2017 quarter to Rs 0.86 trillion in the December 2017 quarter. CMIE estimates that the number of new project started in 2017-18 will be the lowest since 2004-05.
Investors are holding back not just on new projects but on implementing already started projects because the demand anticipated by the investments made in the boom years has not materialised. As a result of this capacity overhang, raising the investment rate to the 30-35 per cent required for 8.5 per cent growth will take time. CMIE reckons that around Rs 100-trillion worth of projects are in this pipeline and one way of accelerating investment would be to introduce some fiscal benefit that would only be available for a limited period, say two years, to push for faster implementation.
The declining rate of investment is at least partly a consequence of the high level of non-performing assets (NPAs) in the banking system (9.9 per cent of assets according to the recent CARE Report). A whole lot of over-leveraged firms, with stressed borrowings, are in no position to invest and, the lending banks are constrained in new lending because of the provisions they have to make to cover these stressed assets. Efforts to remedy this situation are under way but it will take two-three years or more to correct this twin balance sheet problem. A new window of opportunity may have opened up with a recent endorsement by the court of a forced merger of a sick company with a healthier company in the same group. Since the finance minister is also in charge of corporate affairs, he may want to explore this quick-fix option.
Should the set fiscal goals be relaxed to boost growth? This matters if the primary growth impetus has to come from higher public investment. We tried this over the past couple of years and it has not worked. The answer now lies in a more direct attempt to stimulate private investment.
But there are some decisions where the choice has to be made. For instance the reported move to compel public sector enterprises to raise their dividend payments substantially in order to contain the fiscal deficit will affect their capacity to invest. At the present juncture, wherever such a choice has to be made the finance minister must opt for growth, provided the relaxation of the fiscal target is limited to say a 10 per cent excess. The reason for this caution is the emerging threat to the current account and the Budget from rising crude oil prices, and the need to maintain our credit rating because of our continued dependence on foreign investment flows.
At the sectoral level agriculture remains in a distressed state. The problem this year was not weather related but more market related. The prices realised by farmers for most products fell short of minimum support prices (MSPs), quite simply because we have no price support system for crops other than rice and wheat. Today the share of rice and wheat, the only crops for which we have a credible system for ensuring procurement at MSP, and that too in major producing states, account for less than a quarter of the value of crop production. It has been estimated that this year the prices received by farmers for crops without a proper procurement system led to a loss of about 5 per cent relative to the cost levels underlying the announced MSPs. Even in the case of milk, whose aggregate output value exceeds that of rice and wheat
combined, where there is a cooperative based support structure, price realisations have been down by as much as 20 per cent in many markets. We need something more intelligent than loan waivers for short-term relief for agriculturists. The extension of the Madhya Pradesh experiment to compensate farmers for shortfalls in realisation relative to the MSPs may be a useful interim measure while deeper changes in agricultural marketing are effected over the medium term.
The other sectors that need help are the MSMEs and handicraft producers (who have been badly hit by demonetisation and goods and services tax implementation) and the realty business. Measures like fiscal breaks for affordable housing, logistics support for small producers and ancillary industry development could be growth inducing and populist.
What about the pressures the FM must resist? Please, no poorly planned reform dhamakas or half-baked schemes to distribute pre-electoral largesse. Unfortunately that may well be what the political managers of the government will want given the impending 18-month election season. So let’s wait and see.