So India is out of trouble. The current account deficit for the period July to September 2013 is down to 1.2% of the GDP in comparison to 5% of GDP a year earlier. The current account deficit is the difference between total value of imports and the sum of the total value of exports and net foreign remittances. Or to put it in simpler terms, it is the difference between outflow (through imports) and inflow (through imports and foreign remittances) of foreign exchange .
The gross domestic product (GDP) grew by 4.8% during July to September 2013 as compared to the same period last year. This was much better than the growth of 4.4% seen during April to June 2013.
And given this improvement, the Indian economy is starting to recover. Or so we are being told by politicians, bureaucrats, financial firms and stock brokers. The great Indian hope trick is at work. Leading the pack is finance minister P Chidambaram. “ We are going through a period of stress but there is a ground for optimism…we hope things will become better in the second half of the current fiscal,” he said on December 2.
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, seems to be more optimistic than Chidambaram and he expects the GDP growth rate “in the second half of the current year to be better than the first half.”
That might very well turn out to be the case. But whether India grows at 4.8% or 5.1% that is purely of academic interest. It doesn’t matter. If the country needs to get people out of poverty it needs to grow at 8-9%. And the way things currently are it looks very difficult to achieve that kind of growth.
In a speech which was published as an editorial in The Times of India, Chidambaram said “In 2014-15 our growth rate will be close to 6 per cent, in 2015-16 it will be close to 7 per cent and, in the year after, we will be back to the high growth of 8 per cent.”
This is the great Indian hope trick at work. Yes things are looking a lot better on the current account deficit front and GDP growth also seems to have picked up, but there are a host of other economic factors which indicate that getting back to an era of high economic growth will be difficult.
1) The consumer price inflation was at 10.09% in October 2013. Food inflation was even higher at 18.2%. Half of the expenditure of an average household in India is on food. In case of the poor it is 60%. In such an environment people are likely to postpone other forms of consumption which are not immediately necessary, given that more and more of their money goes towards buying food. And this has an impact on economic growth. (In order to understand how inflation is inversely proportion to growth, click here).
2) The slowdown in consumption is clearly visible in the private final consumption expenditure(PFCE) which forms around 60% of the overall GDP, when measured from the point of view of expenditure. The PFCE for the period between July and September 2013 grew by just 2.2%(at 2004-2005 prices) from last year. Between July and September 2012 it had grown by 3.5%. What this tells you is that people are postponing consumption because of high inflation.
3) A slowdown in consumption is visible in a slowdown in car sales. In the month of November car sales of the major players Maruti Suzuki, Hyundai and Tata Motors were down. It is worth remembering that car sales unlike a lot of economic statistics is a real number and not a theoretical construct. Car sales of Maruti Suzuki fell by 5.9% to 85,510 units. The sales of Hyundai were down to 33,501 units by 3.6%. Tata Motors was the worst of the lot, with sales down by 39.8% to 26,816 units. What this tells you again is that people are postponing consumption because of high inflation.
This lack of demand is also reflected in the slowing down of consumer durables output. As Sonal Varma of Nomura wrote in a research note dated October 11, 2013 “consumer durables output growth remained in the negative, possibly due to a sharper slowdown in white goods production.” This is a clear reflection of the fact that people are not interested in buying things.
4) Economic growth in large parts of the world slowed down after investment bank Lehman Brothers went bust in September 2008. India beat the trend and continued to grow. This was primarily on account of the fact that the government decided to spend a lot of money in comparison to what it was doing in the past.
Given this, the actual fiscal deficit for the year came in at Rs 3,36,992 crore, though the target was Rs 1,33,287 crore. So the fiscal deficit basically more than doubled from a target of around 2.5% of GDP to an actual of 6% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends.
This year the government of India does not have the same sort of flexibility. Data released by the Controller General of Accounts (CGA) shows that between April and October, 2013, the fiscal deficit touched 84.4% of the annual target. The fiscal deficit target for the year is Rs 5,42,999 crore or 4.8% of GDP. During the first seven months it was at Rs 4,57,886 crore or 84.4% of the target, suggesting that Chidambaram has very little room left to manage the fiscal deficit.
In this scenario there is very little chance for the government to increase expenditure to drive economic growth. In fact, if one looks at the GDP numbers for the period July to September 2013, the government final consumption expenditure fell by 11.7% in comparison to the period between April and June 2013.
5) Also, it is more or less certain now that the finance minister P Chidambaram will meet this year’s fiscal deficit target by delaying payments. .Reuters columnist Andy Mukherjee explained this best in a column he wrote on October 25, 2013. “India’s government recognizes revenue and costs not when it actually incurs them, but when it writes or receives cheques. By simply delaying payments, New Delhi can therefore give the impression it is sticking to its promise of keeping this year’s budget deficit within 4.8 percent of GDP,” wrote Mukherjee.
So oil marketing companies will not be paid for their under-recoveries in this financial year. Similarly, the Food Corporation of India(FCI) will not be compensated for the grains that it sells at a subsidised price, this year.
What this means is that by postponing payments, the current government will leave a bigger headache for the next government. As economist Abheek Barua writes in a column in the Business Standard “Let’s face the fact that even if Finance Minister P Chidamabaram were to produce a 4.8 per cent fiscal deficit-to-GDP ratio in 2013-14, it would not mark the end of India’s fiscal woes. The only way to compress the fisc this year is on the back of a hefty deferment of big-ticket expenditures such as subsidy payments for oil and fertilisers…How will a new government handle this? Will it have the courage to prune or jettison some of these revenue-guzzling welfare programmes, and risk eternal damnation by voters? Can it afford to finally do away with oil and other subsidies at one shot?”
Such a scenario will not be good for economic growth. Also, if the government continues in its current way, there is always the risk of a downgrade from one of the international rating agencies. And that will mean a run on the rupee.
6) Chidambaram in a recent speech said that “India is not an island. We are part of the global economy, and what happens in the globe will affect India.The global economy…is expected to achieve a growth rate of only 2.9 per cent in CY 2013. Advanced economies are expected to grow at only 1.2 per cent this calendar year. The eurozone area, which is one of our major trading partners, is expected to shrink 0.4 per cent this year. Therefore, what happens in and what we are able to do, must be seen in the context of the global economy.”
This is classic politician speak. When India was growing then it was because of all the things that the government was doing right. And now that we are not growing it is because of external factors. But let me not get into that. The point here is that if the global economy does start to recover, how well is the Indian economy placed to benefit from it through increased exports? Economist Rajeev Mallik of CLSA has an answer. “Recovery in global demand and trade flows will be positive for India, but it’ll be more positive for other Asian economies. This is because even though India’s ratio of exports in GDP has increased in recent decades, it remains the lowest among the Asian economies. Consequently, the incremental increase in growth in some other Asian economies will outstrip that for India,” explains Mallik in a column in the Business Standard.
7) The current account deficit has been brought under control by clamping down on gold imports. Another major reason for its fall is the slowdown in growth leading to lower imports. Imports declined 4.8% to $114.5 billion during the July to September 2013 period. As an editorial in The Financial Express points out “But, more than anything else, it is the continued collapse in GDP that has ensured CAD remains under control, implying that the situation can once again get out of control as GDP picks up—with no policy on opening up of the coal sector, for instance, coal imports will pick up once again as GDP rises.”
8) So in this environment few are investing. As The Financial Express editorial points out “a recent study by Kotak Institutional Equities shows how sanctions for fresh projects have been tapering off from R1,13,900 crore in Q1FY11 to R74,900 crore in Q1FY12, R41,300 crore in Q1FY13 and to just R22,000 crore in Q1FY14.”
What all this tells us is that there are serious economic issues that need to sorted out if India has to get back anywhere near 8% GDP growth rate. In this scenario anyone trying to tell us that India will soon go back to a high economic growth rate is like Salman Khan telling the world that he is a virgin who is saving himself for his wife. We all know that is not something to be taken seriously.
The article originally appeared on www.firstpost.com on December 4, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)