In 1974, Erno Rubik, a professor of architecture, created the Rubik Cube. Rubik created the cube to help explain to his students about spatial relationships. His creation is an apt metaphor for the puzzles in the economy. As with the Rubik Cube, it is essential to align the colours—the cubes within the cube—to get the picture.
The good news is that there is relief on the horizon—for human distress and agrarian stress. The initial forecast suggests an above normal monsoon for India. Naturally, the markets are trilling and the government is thrilled. Intuitively, good rains translate into higher demand and growth—particularly in an economy where five of ten persons depend on the rural economy.
Data for the last drought period validates this. In 2002, a drought year, household consumption (HFCE per capita/WB) was barely 1.14 per cent. The next year, agriculture grew by over 9 per cent and household consumption by 4.18 per cent. Demand revival is a rational expectation.
Expectations of a boost in overall consumption must, however, follow the diktat of necessary and sufficient conditions. It is true that revival of the rural economy will boost some sectors. But data also shows that overall consumption is dependent on global impulses. In 2008, household consumption dipped from 7.7 per cent to 5.6 per cent—thanks to the global financial crisis. And it has hovered around 5 per cent since 2012—thanks to lower and slower global growth.
Indeed, IMF’s latest World Economic Outlook, titled ‘Too Slow for Too Long’, has trimmed global growth for the fourth time in four quarters—to 3.2 per cent in 2016. The good news is that India will grow at 7.5 per cent—faster than China. The forecast is premised on data and on hope. IMF expects rise in private consumption on the back of lower commodity prices and revival of sentiments. Sustenance, the IMF says, requires reforms in labour markets and removal of infrastructural bottlenecks.
The not-so-good news is that India will continue to grow at 7.5 per cent in 2016 and 2017—contrary to expectations of an upward trend—thanks to global headwinds. The reality is that the India Story is no longer just only about India—over half the companies listed on the stock exchanges are fundamentally global businesses.
The aspiration of 8-plus per cent growth requires revival in industry and of exports. The index of industrial production for the 11 months of 2015-16 is just 2.6 per cent and exports are sliding for 15 months in a row. The twin troubles challenge India’s economy. How the global economy pans out impacts balance sheets of nations, companies and banks.
The saga of stranded assets and distressed loans is both about domestic slowdown and crash in global commodities prices. The buzz about nationalisation of distressed assets is up in the air—in India and in Britain. A British MP has even suggested zero cost nationalisation of Tata Steel’s British operations! Regardless of how that plays out, the moot question is how do banks and the government plan to address the issue of stranded assets across sectors.
The economy is wracked by curious mismatches. Headline growth triggers expectations of deposit growth. Deposit growth in banks, however, has fallen to 1963 (pre-bank-nationalisation) levels. In contrast, there is a surge in cash with public—the highest in 10 years. The explanations are vague at best. One theory suggests cash with public is political funding but incremental growth of cash with public in 2014, when general elections were held, was lower at Rs 1.12 lakh crore compared to `2.07 lakh crore in 2016.
And the debate on the reality of growth and credibility of data continues to pop up regularly. There is the chasm between accounts of corporate profits and data on value addition. Then there is the perpetual puzzle—if growth is high, why hasn’t bank credit grown as much as it did when the economy last grew at 7-plus per cent. Certainty about growth is stranded between gross value addition and gross verbiage.
Arguably there is growth. But what about job creation? Between 1999 and 2015, the size of the economy grew from $470 billion to over $2 trillion. So how many jobs were created? Remember roughly 10 million persons are added to the workforce every year. Between 1999 and 2004, India added 60 million jobs, and between 2005 and 2010—arguably the high growth period—a bare 2.7 million in industry and services (Source: 12th Plan).
The Sixth Economic Census (released earlier this month) looked at the period between 2005 and 2013 and the findings are stunning. It reveals that 36.2 million jobs, or 4.5 million jobs a year, were created in eight years of which nearly half were in rural establishments. Maharashtra, UP, West Bengal, Tamil Nadu and Gujarat accounted for nearly half the total employment and the fastest growth in employment was—believe it or not—in Manipur and Assam.
The question is not whether India is creating enough jobs —the answer is obvious. The question is whether governments know enough. In India, the domain of employment generation fits Donald Rumsfeld phraseology of the “known unknown”. To get the colours aligned on the Rubik Cube, you need to get a fix on at least two sides. World over, governments invest in data on two critical factors—employment and consumption. Perhaps Niti Aayog can create a template for time-relevant data on employment and that could lead the analysis.
The dissonance in the political economy is really about the mismatch between job creation and GDP growth. Focus on job creation—in policy and articulation—will enable alignment of the many faces of the economy.
shankkar.aiyar@gmail.com
Shankkar Aiyar is the author of Accidental India: A History of the Nation’s Passage through Crisis and Change