Have Acche Din Arrived? Part 12: Summary and Conclusions
One of the important reasons for doing this exhaustive (and exhausting!), data-driven study of the economy is that one metric does not capture what is happening in the Indian economy, especially today. There has been too much focus on the GDP as a metric of economic growth. There is nothing wrong with using the GDP as a metric. However, during the Modi administration, there has been a lot of confusion and doubt about the veracity of the GDP numbers. The RBI and the Finance Ministry had used a consistent measurement scheme since 1951 to measure the economic output of India, and it was therefore possible to do comparisons on how India grew during one period with how it grew during another period.
However, after the Modi government took over, the government, before releasing its economic number for its first year in office which, according to most estimates, was going to be 4.5%, as per the old method of calculation, changed the method of calculation and said that the growth rate for 2014-15 according to the new method was about 2 percentage points higher than estimated by most economists. Normally, when a new methodology is presented, a back series is also given so that one can see how previous years’ growth numbers look like in the new method. This was not provided for a long time.
When they were finally provided, two years later, and one could see that, even with the new method, the growth during the UPA years were better than that during the Modi Sarkar, the government again revised the calculations for the previous years – twice – until it was able to show that the GDP numbers for the UPA years were, in fact, lower than during the Modi Sarkar.
Because of the opaqueness of the process followed by the government, it is hard to take these numbers credibly. It almost seems like the figures for the previous governments were tortured repeatedly until they acquiesced to becoming lower than the Modi government’s numbers.
The whole process has completely destroyed the credibility of the government and its institutions. Nobody in the world today believes the numbers the Indian government puts out. To put it bluntly, a large percentage of Indians and observers in the rest of the world believe that the Modi Sarkar’s GDP numbers are “fudged” or “doctored.” Former RBI governor Dr. Raghuram Rajan and former Chief Economic Advisor Dr. Arvind Subramanian have both questioned the veracity of the new GDP data. Recently, a group of 108 top economists questioned the credibility of the data put out by the government.
It is to verify whether this is the case, and to see whether the claims of faster growth under the Modi Sarkar are true, that this series is looking at various economic indicators apart from the actual growth numbers put out by this government. Keep in mind that these other economic indicators also come from the very same government. One would then question the wisdom of looking at this data. The answer is that even if the government tried to fudge numbers to make its performance look better, it would be hard put to fudge so much data – and there is a huge amount of data that the government collects. So if we look at enough data, we will get a proper picture of the health of the economy.
It should be pointed out that all these numbers anyway only measure the formal economy; the informal economy is not measured but estimated. There have by now been numerous articles documenting the destruction of the informal economy due to demonetization. In a normal, healthy economy, the informal economy follows the formal economy; but in the post-demonetization scenario, the growth in the informal economy may have gone to zero or even be negative. Therefore, the growth for the economy as a whole may not be anywhere near the 7% that the government claims, but something much lower.
Be that as it may, we only have data for the formal sector, and we see that even in the formal sector, and even using the government’s own statistics, the Modi Sarkar’s performance is far from sterling.
What we have learned from this study is that the government’s claim that the economy is growing faster than ever before, or even close to the previous pace, is simply impossible to accept. The following are some of the reasons why this is so.
- Average annual percentage growth of industrial output slumped from 7.6% in UPA II (and 13.7% in UPA I) to -0.4% in the Modi Sarkar.
- Gross Fixed Capital Formation (GFCF) increased from 36.6% of GDP in UPA I to 38% in UPA II and then slumped to 32.2% in the Modi Sarkar.
- The average annual growth rate of the Index of Industrial Production (IIP) for manufacturing went from 5.8% in Vajpayee’s NDA to 11.9% in UPA I to 5.0% in UPA II to 3.9% in the Modi Sarkar.
- The direct tax collection as a percentage of GDP was 3.9% during UPA I, 4.1% during UPA II, and 3.6% during the Modi Sarkar. This is not because of reduction in personal income tax collections but lower corporate tax collection, which went from 2.5% of GDP in UPA I and 2.6% of GDP in UPA II to 2.1% of GDP under the Modi Sarkar.
- The average annual growth percentages of exports went from 11.9% during NDA I to 16% during UPA I to 10.5% during UPA II to -1.7% during the Modi Sarkar. As a percentage of GDP, exports went from 13.5% of GDP in UPA I to 16% of GDP in UPA II to 13% of GDP in the Modi Sarkar.
- The only reasons our current account deficit does not look terrible after four years of the Modi Sarkar are
- a) Modi got incredibly lucky with oil prices reaching almost $30 a barrel during his time, in sharp contrast to the nearly $140 a barrel that the Manmohan Singh governments experienced; and
- b) FDI inflows during the first few years of the Modi Sarkar were high – but these are now coming down, probably as a sign of global diffidence in the Indian economy today. The UPA I government managed almost as good a CAD with much more adverse conditions, such as a global recession. The rate of foreign exchange addition was better during UPA I because the Balance of Payments was better then than that of the current government.
- Electrification rates, rural and urban, are par for the course, and not much better than before, despite grandiose claims to the contrary.
- Foodgrain production is not growing as fast as it did during the UPA years, and foodgrain yield is also lower than during the UPA years, despite claims of the use of “soil-health cards.”
- Electric power generation is on par with previous administrations.
- Coal production is on par with previous administrations.
- Growth in steel production has dipped more than 2% relative to UPA II, and the growth rate of consumption of steel is 2% lower than UPA II and more than 4% lower than UPA I.
- While the growth of the road network is healthy, and the growth of the rail network is on par with previous administrations, the growth in passenger traffic and freight tonnage on the railways has dipped drastically. From a 6.4 % annual growth rate in passenger traffic, the annual growth rate has slipped to 0.3% in the Modi Sarkar. Also, from a growth rate of 7.7% in UPA I to 3.9% in UPA II, the growth in freight tonnage slid down to -2.3 % under the Modi Sarkar.
- Container port traffic also declined under the Modi Sarkar – from an average annual growth rate of 15.4% in NDA to 13.4% in UPA I to 7.2% in UPA II to 5.5% in the Modi Sarkar.
- Annual growth in education spending is down from 10.9% (UPA I) to 7.4% (UPA II) to 4.2% (Modi Sarkar).
- Other parameters related to science and technology, such as annual growth in scientific and technical publications, number of patent applications, and high-tech exports, are also growing sluggishly.
- Indirect taxes had to be increased (through fuel taxes and other means) and defence expenditures had to be cut, to keep the deficit within reasonable limits because corporate tax collection was significantly lower – another clear sign of an economy in crisis. Both these measures caused widespread distress among the lower-income sections of the people.
Several of these points are inter-related and point to a general slowdown in India. For example, steel consumption being down points to lower demand for manufacturing, which then reflects in lower industrial output, lower GFCF, lower IIP for manufacturing, and lower exports. If industrial output is lower, it follows that container port traffic and railway freight traffic will be lower, although these could also be lower due to inefficiencies and bottlenecks that have not been addressed.
The government does not seem to be investing sufficiently for the future. Investment in education, science and technology is down.
Higher indirect taxes will have doubtless worsened the condition of the poorest sections of society.
Foodgrain production and yield have plummetted. The annual growth rate of total foodgrain production has dropped from 2.7% (UPA II) to 1.9% (Modi), and the yield of foodgrains has come down from an annual growth rate of 2.1% during the UPA years to 1.6% during the Modi Sarkar.
And we have the bizarre spectacle of a government that claims there is no data on jobs, even as a leaked report of the government says that unemployment is at its highest in 45 years.
About the only good news on the economy is a lowered fiscal deficit (but only 0.3% lower than that of the UPA I government) and a lower inflation rate.
It is true that inflation was high during the UPA years and is much lower in the Modi years. But we need to understand why this is so.
There are two ways the inflation rate can be affected.
If the supply of goods and services is inelastic (that is, it does not change in response to demand), then if extra money is pumped into the population, demand for goods and services will rise, and this will lead to price inflation. This is what happened during the UPA governments.
The wide-ranging welfare reforms implemented by the UPA, such as MGNREGA, RTE, and FSB, put cash into the pockets of the wretchedly poor and thereby caused food inflation. That one should not do this for the financial health of the country is an economic argument; but that one should do this to help those living in dirt-eating poverty get a better shot at life, and thereby enable the nation to make use of this human capital in the future, is also a valid moral (and economic) argument. The inequalities we have in India are not small, and these can cripple our country. It is true that food became more expensive for many of us – but a few of us were finally able to eat because of that. One of the big economic benefits from putting money into the pockets of the really poor is the ability to reduce stunting in children which arises due to malnutrition. A little extra money can greatly help us make use of these people to enhance our country’s productivity.
In the Modi Sarkar, a different phenomenon is at play. As we have already seen, industrial productivity and output has slowed, agricultural output has slowed down, corporate tax collection is down, and indirect taxes are sharply up. Essentially, the economy is in a slump, and so there are no jobs. The future is uncertain, and so people either have no money to spend on goods and services or are afraid to spend, preferring to save their money for a rainy day. The net effect is that demand is down, and because of that prices are down. Thus the low inflation during the Modi years is not a good thing and is a sign of a sick economy.
All these facts are inconsistent with the claims of a country growing at 7% or thereabouts. As Dr. Raghuram Rajan, former RBI governor, said recently in an interview, “I know one minister (in the Narendra Modi government) has said how can we be growing at 7 per cent and not have jobs. Well, one possibility is that we are not growing at 7 per cent.”
In fact, quite the opposite seems to be the case: the country is facing an economic crisis today.
Some friends of mine have argued with me that this is not India’s fault nor that of its administrators – that the lowered growth we are seeing is a result of a global slowdown. China’s growth is slowing down, and as China slows down, so does the world.
This is a valid counter-argument; however, the quality of economic leadership in a country is based on how it responds to challenges like these. A prime example of how to recover from a global crisis was proffered by the UPA-I government under Dr. Manmohan Singh, which was in charge in India during the global financial crisis of 2008 – the worst financial crisis to hit the world since the Great Depression. Even though India took a hit along with the rest of the world, it recovered fastest from the crisis among all the major economies of the world – within a year, as the attached chart shows; while most major countries took two years to recover from the crisis.
Good economic leaders make timely interventions to solve crises and do not let crises overtake them. The UPA government showed that kind of leadership in 2008; the present government seems incapable of any innovative intervention to solve the economic and financial problems facing this country.
In summary, it seems difficult to conclude that our days are any better than before – that they are any more “acche” than they were. In fact, in most metrics, our lives appear to have become worse, or “bure.”
And I haven’t even discussed the widespread devastation caused by the giant folly known as demonetization in any detail in this series.
On objective grounds, therefore, the Modi Sarkar seems to have failed in its economic promises. Acche din have not arrived – perhaps, bure din have arrived because of the mistakes of this government, and it will take years for the next government to overcome these bure din and bring real acche din to India.