State of Indian economy

Prabhat Patnaik

Volume II of the Economic Survey which was brought out by the ministry of finance a few days ago paints an extremely grim picture of the Indian economy. The growth rate of real Gross Value Added (GVA which is the appropriate thing to look at, since the GDP measure includes net indirect taxes and hence does not truly reflect output trends), was 6.6 per cent for 2016-17 as a whole, compared to 7.9 per cent for 2015-16. More importantly, the quarterly growth rate (ie, the growth rate of GVA in a particular quarter over the corresponding quarter of the preceding year) kept declining in every successive quarter during 2016-17, the fourth quarter growth rate being just 5.6 per cent, which was roughly 3 per cent below that of the fourth quarter of 2015-16.
Besides, even this growth rate was artificially boosted by two factors: one was the unusually good agricultural performance because of favourable weather (real GVA growth rate in agriculture was 4.9 per cent in 2016-17 compared to a mere 0.7 per cent in 2015-16), and the other was the growth in public administration and defence because of the 7th Pay Commission award. (This sector’s real GVA growth rate for 2016-17 was 11.3 per cent compared to 6.9 per cent for 2015-16). If we take out these two sectors then we get what the Survey calls “Core GVA”. The growth rate of “Core GVA” was just 6.2 per cent in 2016-17 compared to 9.8 per cent in 2015-16, a drop of 3.6 per cent. And given the fact that the growth rate during the year was not just lower but declining through time, the fourth quarter growth rate in Core GVA was as much as 6.8 per cent lower in 2016-17 compared to 2015-16. This is deceleration with a vengeance.
What is more, this deceleration is certain to continue into the next year. There are at least three strong reasons for this. One is that the effect of the increase in public administration and defence will no longer be there, which in turn will affect the economy in two ways. The obvious way is the slowing down in this sector’s own growth rate. But the less obvious one is the following.
If the government increases salaries by say Rs 100, then this directly gets counted as an increase in output of that magnitude (which is methodologically bizarre but let us ignore that for the time being). In addition however this Rs100 gets spent, which increases demand and hence output in some other sectors. And when that happens then additional incomes are generated in those sectors which in turn also get spent and thereby generate still further incomes, and so on. This is referred to as the “multiplier” effect of the increase in government expenditure. Such a “multiplier effect” ensures that the overall increase in GVA as a result of the increase in government expenditure of say Rs 100 is a multiple of this sum, something like Rs 300 or thereabouts.
When the Survey talks of the increase in GVA because of increased government spending owing to the 7th Pay Commission award, it refers only to the direct effect of this increase (in boosting this particular sector’s GVA), not the total effect via the operation of the “multiplier”. The 2016-17 GVA growth rate even in the “core” sector in other words was buttressed by the expenditure which occurred in the “non-core” sector of public administration and defence and which got expressed in this sector’s own GVA. If despite this fact the Core GVA growth in 2016-17 was just 6.2 per cent, then what it would have been in the absence of this boost can well be imagined. By the same token however, next year not only will this boost not be there, but its “multiplier effects” too will not be there. Hence the slowing down in the overall GVA growth will be quite substantial for this reason.
The second factor working in the direction of further deceleration in the growth-rate next year is the stressed balance sheets of several companies belonging to the power and the telecommunications sectors. Such stressed balance sheets in turn threaten the banking system, especially the public sector banks which have given them huge loans, with a crippling burden of non-performing assets. The question needs to be asked: why are the nation’s public sector banks threatened, and not the private sector banks including foreign banks? The answer simply is that in the name of developing “infrastructure” the government coerced public sector banks into giving out large loans to private companies owned by the big corporates in these sectors. The private sector banks including foreign banks were smart enough to avoid falling into such traps and the government could not coerce them into doing so. As a result now it is the public sector banks that are facing a crisis and not the private sector ones. (IPA/To be continued)

Friday, 8 September, 2017