If Chidu’s growth prediction has to be met India will have to grow by 8% this quarter

Economist Bibek Debroy in a recent column in The Economic Times wrote about a perhaps apocryphal story about John Maynard Keynes, the greatest economist of the twentieth century. Keynes it seems was once asked “How is your wife?”. “Compared to whose wife?” Keynes questioned back (on a totally unrelated note Keynes was married to a Russian ballerina named Lydia Lopokova).
The point Keynes was perhaps trying to make is that comparisons are always relative.
The finance minister P Chidambaram has been following this for a while now. He has been comparing the Indian economic scenario with the Western countries, and trying to tell us that we’re not in as bad a scenario as is being made out to be.
In interim budget speech Chidambaram said “World economic growth was 3.9 percent in 2011, 3.1 percent in 2012 and 3.0 percent in 2013. Those numbers tell the story. Among India’s major trading partners, who are also the major sources of our foreign capital inflows, the United States has just recovered from a long recession; Japan’s economy is responding to the stimulus; the Eurozone, as a whole, is reporting a growth of 0.2 percent; and China’s growth has slowed from 9.3 percent in 2011 to 7.7 percent in 2013…The challenges that we face are common to all emerging economies. 2012 and 2013 were years of turbulence. Only a handful of countries were able to keep their head above the water, and among them was India.”
So, if we compare India to the other countries, we are not in as bad a situation as is being made out to be. Or so Chidambaram has tried to tell us over and over again. In fact, in July 2013, 
he had said that “People should remember India continues to be the second fastest growing economy after China. Even China’s growth which was at 10% has come down to 7% now, while our growth has slid to 5% from 9%…Economic slowdown is there in all the countries. When there is slow growth rate in the world, India cannot remain unaffected.”
Now compare this with what he said in January, 2014. “India remains one of the fast growing large economies of the world,” Chidambaram 
said on January 15, 2014.
From being the second fastest growing economy in the world in July 2013, India had become one of the fast growing large economies in the world, as per Chidambaram. What happened during this period? What is Chidambaram not telling us?
As Mythili Bhusnurmath wrote in a recent column in the The Economic Times “Because we’re not even among the top five or 10! A look at recent World Bank data on GDP growth in 2013 shows we’ve been overtaken not just by China but by a host of countries: Cambodia (7.3%), Philippines (6.9%), Indonesia (6.2%), Myanmar (6.8%), Vietnam (5.1), Sri Lanka (7.0%) and, hold your breath, Bangladesh (5.8).”
The thing with comparisons is that one can choose who one is compared with, and make oneself look better. And that is what Chidambaram has been doing all this while. When Indian economic growth is compared with countries in the emerging markets, the ‘real’ picture comes out. Our economic growth (as measured through GDP growth) is slower than that of even Bangladesh.
Over and above this, when comparisons of these kind are made, the “base effect” also comes into play. As per World Bank Data the gross domestic product of the United States in 2012 was around $16.2 trillion dollars. If the US economy grows by 2% it adds around $324.9 billion of output to the economy.
The size of the Indian economy(i.e. Its GDP) in 2012 as per the World Bank data was $1.82 trillion. So, if the Indian economy has to grow by $324.9 billion in a year, it will have to grow at close to 17.6% or nearly nine times the pace at which the US economy grew. Hence, a 2% growth in the US goes a much longer way than even a 10% growth in India, because the growth is on a higher base. Also, this growth is to be shared among fewer people in comparison to India, and hence, has a greater impact.
Lets try and understand this through real numbers. During 2013, the US economy grew by 2.5%. At the end of 2012, the GDP of the US economy was $16.2 trillion, as mentioned earlier. A growth of 2.5% means that around $406 billion of output was added to the economy. This added output is to be shared among 32 crore Americans.
Now lets to the same exercise for India. During the period 2013, the Indian economy grew by around 4.7%. In 2012, the GDP of the Indian economy was at $1.82 trillion. This means an output of around $86.5 billion was added to the economy. This added output is to be shared among more than 120 crore Indians.
Hence, the US is much better of at 2.5% growth than India is at 4.7%.
Also, the United States, most countries in the Euro Zone and Japan are developed countries. Hence, even if they grow at low rates, it does not matter beyond a point. That is not the case with India, which continues to be a very poor country, and the only way for it to come out of this rut is faster economic growth.
India’s economic growth, as measured by the growth of the GDP, for the period between October and December 2013 came in at 4.7%. In fact, the fastest growing industry was financing, insurance, real estate and business services, which grew by 12.5%, in comparison to the same period in 2012.
This industry had grown by 10% in the three month period between July and September 2013. And it had grown by 8.9% during April and June 2013.
So how did this growth suddenly jump to 12.5%? 
An editorial in The Financial Express has an explanation. “Had it not been for the $34 billion the RBI managed to get by way of FCNR[Foreign Currency Non-Repatriable] deposits in the last quarter of 2013—the result of it agreeing to share the cost of currency hedging with investors—the growth would have been dramatically lower than even the 4.7% headline number. The bulk of growth in Q3 came from a bump in the financing/insurance sub-sector where the major change was really the FCNR deposits growth… Since this segment’s growth rose from 10% in Q2 to 12.5% in Q3, this alone resulted in a higher growth of 0.48 percentage points. In which case, it is a safe bet to assume Q3 GDP growth was around 4.3-4.4% without the one-time RBI bump.” Hence, if the FCNR deposits hadn’t suddenly shot up, the growth would have been lower than 4.7%.
In the first quarter of the 2013-2014(i.e. the period between April 1 and June 30, 2013) came in at 4.4%. In the second quarter (i.e. the period between July 1 and September 30, 2013) it came in at 4.8%. So what this means is that we are set of another year in which the economic growth will be less than 5%.
Chidambaram had said in February that there are signs of upturn in the economy and the economic growth for the year 2013-2014 (the period between April 1, 2013 and March 31, 2014) will be at 5.5%. A back of the envelope calculation shows that the economy will have to grow by 8.1% in January to March 2014, for the Indian economy to have grown by 5.5% during 2013-2014. And that is not going to happen. Economic growth for the period 2013-2014 will be less than 5% and that is a safe prediction to make. This is the first time since the mid 1980s that India will grow at less than 5% for two consecutive years.
Of course, Chidambaram is not telling us that.
The article originally appeared on www.FirstBiz.com on March 4, 2014

 (Vivek Kaul is a writer. He tweets @kaul_vivek)

Post interim budget, the threat of a downgrade remains

standard and poor'sVivek Kaul
On February 28, 2013, the finance minister P Chidambaram, presented the budget for the financial year 2013-2014 (April 2013 to March 2014). In this, he projected a fiscal deficit of Rs 5,42,499 crore or 4.8% of the gross domestic product (GDP). Fiscal deficit is the difference between what a government earns and what it spends, expressed as a percentage of the GDP.
All through the year, Chidambaram maintained that come what may the government won’t cross the fiscal deficit of 4.8% of the GDP. In the end he stood by his promise, but only on paper. The fiscal deficit for 2013-2014 is now estimated to be at Rs 5,24,439 crore or 4.6% of the GDP.
It was important that the government did not cross the target of 4.8% of the GDP that it had set, given the threat of a downgrade from international rating agencies.
The rating agency Standard and Poor’s (S&P) currently rates India as BBB-. This is rating is the lowest rating in the investment grade. If India were to be downgraded, its rating would fall to BB or the first stage of the junk status.
This would mean that a lot of foreign investors would have to sell out of the Indian bond market as well as the Indian stock market,given that they are not allowed to invest in countries with a junk rating. This would lead to huge pressure on the rupee as foreign investors cashing out will convert their rupees into dollars.
In fact, in November 2013, S&P had maintained the “negative” outlook on India. This meant that there were chances of a downgrade, over the next 12 months. As the rating agency had said in a release “The central government’s budget balance[i.e. the fiscal deficit], however, tells only part of the Indian fiscal story. Using a broader measure of general government deficits, we project a 7.2% of GDP deficit for fiscal 2014, to which one should add 1-2 percentage points of GDP deficits for the unprofitable portions of the consolidated public sector, including state electricity boards and oil-marketing companies.”
Keeping this definition of fiscal deficit in mind, how has the finance minister P Chidambaram done? It is safe to say that the fiscal deficit of 4.6% of the GDP is at best a hogwash. In order to arrive at that number, the finance minister has under-budgeted for petroleum, food and fertilizer subsidies in a major way. Estimates suggest that payment of more than Rs 1,20,000 crore worth of subsidies has been postponed to the next year.
Take the case of petroleum subsidies. Chidambaram had budgeted Rs 65,000 crore towards it. The number has now been increased to Rs 85,480 crore. Of this amount, a substantial chunk has gone towards payments of petroleum subsidies that should have been paid in 2012-2013( April 2012 and March 2013) but were postponed to 2013-2014.
In fact, data released by the Ministry of Petroleum and Natural Gas in early February shows that the oil marketing companies have reported under-recoveries ofa total of Rs 1,00,632 crore during the first nine month of 2013-14 (April-December) on the sale of diesel, PDS Kerosene and cooking gas. Hence, the Rs 85,480 crore budgeted towards oil subsides is clearly not enough.
On the earnings side, Chidambaram has indulged in massive asset stripping to match his numbers. He has forced public sector banks, which are in a financially fragile state, to pay interim dividends of close to Rs 27,000 crore. ONGC and Oil India Ltd have been forced to pick up shares worth Rs 5,000 crore in the loss making Indian Oil Corporation, a company which no private investor wants to touch. And the government has also managed to get more than Rs 19,000 crore from Coal India, as dividend and dividend distribution tax.
Anyone who understands some basic accounting will tell you that using assets to pay for regular expenditure is never a great idea. Rating agencies like S&P obviously understand this. And that is why it had said in November 2013 that using broader measures, the fiscal deficit comes to greater than 7.2% of the GDP. In that sense, the deficit of the government is clearly greater than the 4.6% of the GDP that it has arrived at, once the accounting shenanigans are taken into account.
Given that, the threat of a downgrade remains. As S&P had said in November “we expect to review the rating on India after the next general elections when the new government has announced its policy agenda.” The agency plans to look at the fiscal policy of the next government as well, among other things. Given the mess the current fiscal policy is in, it will be very difficult for the next government to do much about it. The only way out is to slash government expenditure massively. And that is easier said than done.

 The article originally appeared in the Daily News and Analysis (DNA) dated February 18, 2014 
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected]