The flat-lining of investments is corroborated by the lower earnings, operating income and lean order books of major investment goods manufacturers in the country. Unless business confidence returns, there will be fewer takers for the PM’s exhortation to India Inc to take risks and invest now. “Till Indian companies invest, foreigners won’t”, noted a leading industrialist present at the PM-India Inc meeting.
Is India’s economy growing slower or faster? The CSO’s latest GDP numbers for April-June (Q1) 2015-16 has triggered a debate among economists. A good part of the problem is the new base year and methodology for computing the nation’s output of goods and services. But a bigger one is perhaps the penchant of economists to be deeply divided between both. Growth in GDP at market prices in Q1 of 2015-16 is estimated at 7 per cent, which is slower than 7.5 per cent in Q4 of 2014-15. If gross value added is used, growth is faster at 7.1 per cent in Q1 of 2015-16 from 6.1 per cent in Q4 of 2014-15.
The difference between GDP (Gross Domestic Product) at market prices and GVA (Gross Value Added) is that the former includes indirect taxes minus subsidies. The former is also comparable to what is used internationally by the IMF. For starters, why should the basis for comparison be only the preceding three months? Why cannot it be comparable Q1 growth numbers of previous years? Regardless of whether one uses GDP at market prices or GVA, the disturbing picture that emerges is that overall growth has flat-lined. According to GDP at market prices, growth is stuck at 7 per cent since Q1 of 2013-14. Same is the case with GVA numbers although they are a tad higher.
India’s latest growth number thus has not budged from the pace of expansion registered during the first quarter of 2013-14. Obviously, such a performance does not augur well for meeting the government’s ambitious target of 8.1 to 8.5 per cent this year. Growth has to average 8.5 per cent to 9 per cent over the next three quarters to meet this target. This appears most unlikely considering the bleak global growth landscape in which there is hardly any country experiencing a blistering pace of expansion. A 7 per cent growth rate, however, is not to be sneezed at as there are very few countries in the world currently growing at this pace.
The 7 per cent plus growth club includes African countries like Chad, Democratic Republic of Congo, Cote d’Ivoire, Rwanda and Tanzania. In the neighbourhood, Bhutan and Myanmar are in this fast-growers list. And there is Lao in South-east Asia. If we lower the bar, only 63 out of 189-odd countries are likely to grow by 4 per cent or more this year, according to the IMF. The growth prospects in the world economy would deteriorate if the slowdown in China’s growth gathers momentum. If a country that accounted for 40 per cent of global growth last year cannot expand as fast as it did in earlier decades, it can trigger a global recession by itself.
The flat-lining of India’s growth ought to concern policy makers. The focus really ought to be on strengthening economic fundamentals to boost growth. The priority ought to be rekindling the animal spirits of investors and becoming an attractive destination not just for FDI but also domestic investments. Only then can the economy expand faster. While it definitely made sense for India’s PM to summon India Inc to discuss the global situation and how the country can seize the emerging opportunities, the latter predictably outlined their own woes, ranging from higher taxes to protecting domestic industries like steel from dumping.
As yet, there are no green shoots of recovery in investments, especially by Indian businessmen. There is no uptick in new industrial projects or those that were shelved earlier and have come on stream. Although the clearing of stalled projects has begun, there is still a backlog. Even if this is cleared, there is the problem of attracting private investments in infrastructure. Investor sentiment will also revive if there is greater clarity and stability in tax laws. The flip-flop of the government on the Minimum Alternate Tax (MAT) is a case in point. The government’s U-turn on this vexing tax for FIIs is largely due to the adverse impact it has had on investor sentiment.
Although the proximate cause was stock market turmoil in China, FIIs sold as much as $2.59 billion worth of shares in the equity market in August. Their bearish mood has persisted with sales of $417 million till early September, according to the National Securities Depository Ltd. The foreign direct investors, too, will reconsider their plans to take a long-term bet on the country’s prospects if the conditions for doing business do not improve on the ground. For all the efforts of the government to make it easier to start and operate a business, a big concern for investors remains the sanctity of contracts and enforcing them through the legal system.
India’s growth is stuck at 7 per cent as there has been no durable rebound in investments even in the latest numbers of the CSO. The spending on building factories and machinery adjusted for inflation was 29.8 per cent of GDP at market prices in Q1 of 2015-16, which is identical to the rate of capital formation in Q1 of 2013-14. The flat-lining of investments is corroborated by the lower earnings, operating income and lean order books of major investment goods manufacturers in the country. Unless business confidence returns, there will be fewer takers for the PM’s exhortation to India Inc to take risks and invest now. “Till Indian companies invest, foreigners won’t”, noted a leading industrialist present at the PM-India Inc meeting.
No doubt, there will be sceptics on what sort of opportunities can India seize when the world economy is fragile and hovering on the brink of a recession. The only major positive is the sharp decline in oil prices. The most powerful economy in the world, notably the US, is the only one in a relatively strong position. But this is not the case in the Euro area and Japan. China’s stock market turmoil has already impacted India. And with competitive currency devaluations and shrinking global trade, isn’t it enough if India strengthens its economy and starts growing faster?
(N Chandra Mohan is an economics and business commentator
based in New Delhi)
N Chandra Mohan
