GDP: How deep is the slowdown?
The good news is that GDP growth in the next quarter or the fourth quarter could well be a wee bit higher. The pop thesis is that given the lower base of the previous year, growth could be statistically higher—a bit like standing next to Leonardo DiCaprio, who is six feet tall, and then next to Tom Cruise, who is 5 feet 7. The bad news is that the slowdown is not going away anytime soon.
So how deep is the slowdown? Consider this. GDP is measured in nominal and real terms—in nominal terms it is basically GDP at market value inclusive of inflation, and real GDP is arrived at after adjusting for inflation. India’s growth in the second quarter of 2019 has dipped to a six-year low. Data illustrates the spectre better. India’s second-quarter growth in 2018-19 was 7 per cent—adjusted for inflation. In 2019-20, second-quarter growth inclusive of inflation is 6 per cent.
Curiously, the explanation is that lower nominal growth is the fallout of inflation targeting, as if the price to be paid for lower inflation is lower growth. China too has had low inflation but yet has recorded a better real growth rate. Indeed, not long back India was the fastest growing economy. No more. Even though the headline story about China is the slowdown, China’s real GDP growth in the second quarter, adjusted for inflation, was 6.2 per cent (and 6 per cent in the third quarter). India’s growth in the second quarter inclusive of inflation is 6 per cent.
The slowdown is not nominal and very real. Friday saw two sets of data released by the government—Q2 GDP details and core sector growth rates. Shorn of the numerals and decimals, the picture is gloomy. A good way to appreciate data is to see what is up and what is down. In terms of gross value addition (GVA), agriculture is down, mining is barely positive, and manufacturing is in the negative zone. The picture is no different on the GDP chart. And what is truly ominous is the state of the core. Output in every segment, barring fertilisers and refinery products, shrank and the core sector contracted by 5.8 per cent. But naturally, given the slowdown in demand and consumption, there is a clamour for more government stimulus.
The theory of economic growth is illustrated by the maxim ‘money makes the mare go’. But the reality is that there isn’t enough money to go around. As of October 31, the government had spent `16.54 lakh crore out of `27.86 lakh crore budgeted for the full year. But spending depends on revenues. Till the end of October, revenue collections were `9.07 lakh crore and the target for the year is `19.62 lakh crore. Remember, the target was based on nominal growth of 12 per cent, whereas nominal growth in the first half of the year has been barely 7 per cent. Can lower nominal growth deliver higher revenues?
Will the twain—expenditure and revenue—balance out? Facts from history do not inspire confidence. In 2018-19, the government promised to spend `24.42 lakh crore but slashed expenditure and spent only `21.41 lakh crore as revenue collections slid from the targeted `17.25 lakh crore to `14.30 lakh crore—and mind you, growth in 2018-19 was better than it is now.
The hope balloon in the air is that disinvestments and privatisation of BPCL will deliver a windfall, and the sell-off of Air India will save costs. Can the government meet the deadline? We know that the sell-off of Air India—besides the merits or demerits of the case—depends on due process. As of now the government is yet to arrive at a valuation of what it plans to sell. The sale of BPCL will require disclosures, due diligence, seeking expression of interest and a global auction, and it looks unlikely that a deal can be concluded this fiscal.
The relation between spend and growth is not quite linear. Availability of money and expenditure hasn’t quite fuelled growth. Votaries of the spend-and-grow hypothesis argue that relaxing the cap from, say 3.4 to 3.8 or even 4 per cent of GDP, will spur growth. The fact is that the government did use public monies—even if it is not reflected in the budget—to stimulate the economy. It offshored expenditure onto the books of parastatals—for instance, food subsidies of `1.9 lakh crore owed to FCI. Payments were rescheduled—for instance, GST compensation of 2019-19 to 2019-20. It is estimated that if these monies were accounted for, the fiscal deficit cap would have been breached by around `3 lakh crore. And yet, despite fiscal calisthenics, growth is flailing at 4.5 per cent.
The fact is the efficacy of government spending depends on how the spending is funded—by further borrowings or monetisation of assets—and what it is spent for. The ideal construct would be for the government to monetise its assets and declare a glide path on how the monies would be utilised. A useful mantra would be to design spending to resolve issues—fixing backward and forward linkages for farmers, set up a bad loans bank, fund apprenticeships, fill up vacant posts, finance rural infra—and thereby kick-start the virtuous cycle of jobs, income, consumption, demand and investments.The harsh reality is that unless spending is designed with objectives, government spending is as effective as the flyovers on India’s arterial roads—they move traffic until the next jam.