The mirage of economic recovery
Latest estimates of quarterly growth released by the Central Statistics Office (CSO) suggest an improvement in economic activity. Compared with the first quarter of this fiscal when year-on-year GDP (gross domestic product) growth hit the lowest level of 5.7% for this government, GDP growth for the second quarter has improved to 6.3%. For most of the analysts and government, this has come as good news considering that GDP growth has been decelerating for the last five quarters. While the growth rebound in the second quarter may have brought cheer to the government, a closer look at the data suggests that the real worries which had led to the deceleration in the growth rates remain unabated.
The slowdown in the economy has been going on for some time now, almost two years. Counter to popular narratives, the slowdown was not caused by demonetisation and the hurried implementation of the goods and services tax (GST) but predates these two structural changes in the economy. But these two did cause disruptions which accelerated the slowdown or at the best were instrumental in prolonging the slowdown. But these were expected to be transitory and the effect of these will fade out as remonetisation picks up pace and the GST system stabilizes.
The real reason why the economy was slowing down was a decline in demand, starting with the agricultural sector which then spread to other sectors of the economy. This was obvious from the decline in prices causing deflationary pressures but also in falling incomes and increasing joblessness. But the most important evidence of lack of demand has been the decline in real wages. The real question that begs an answer is whether the recently released estimates of second quarter suggest a break in the trend as far as demand depression is concerned. The short answer is no.
While the overall growth rate has recovered, it is much below the potential growth rate of the economy even by government’s own standards. But while overall growth rate has recovered on the base of a recovery in manufacturing growth rate, these should be treated with caution given the lack of information on the informal sector. In fact, statistical issues are not just evident in the manufacturing sector with increasing divergence between the IIP (Index of Industrial Production) and the manufacturing growth rate from the national accounts but also due to the challenge posed by the GST system. Unlike earlier estimates which were based on sales tax data, the new methodology relies on too many assumptions, some of which will only be standardized after some time.
But what is worrying is that other than manufacturing, mining, utilities and construction, all other sectors continue to show deceleration. The growth rate of construction, even though it has improved marginally, continues to show signs of stress. But the largest deceleration is in agriculture which has decelerated from 4.1% growth in the second quarter of last year to 1.7% in second quarter this year. Even this is misleading with much of the growth in agriculture actually coming from livestock, forestry and fishing which has grown at 3.8% with food grain production actually declining by 2.8% compared to 10.1% increase last year. The deceleration in agriculture with continued stress in construction suggest that the pressure points of the economy as far as rural demand is concerned are still important. Note that agriculture and construction also happen to be the largest employers in rural economy. With both these sectors underperforming, the decline in rural incomes will continue to remain a challenge to any attempt at reviving the economy.
While rural demand continues to remain sluggish and in danger zone, even the other drivers of the economy are showing signs of stress. Government expenditure, which increased at more than 15% year-on-year for the last five quarters, has slumped to 4.1%. This will be further under pressure given that 96% of fiscal deficit target has already been spent. But even private consumption with a growth of 6.5% has slowed from a growth of 6.7% last quarter. The growth of private consumption is the lowest in the last eight quarters signalling a real crisis of demand in the economy. Finally, despite the recovery in global growth and global demand, the growth rate of exports has remained stagnant at 1.2%.
Clearly, signs of economic recovery based on second quarter data are nothing else but a mirage. Fundamental problems of the economy, most importantly demand depression in rural areas continue to remain serious. Any euphoria based on these numbers will only be transitory but is likely to take away attention from the real issues facing the economy. While these continue to remain serious issues, the threat of inflationary pressures continue to pose challenges to fiscal and monetary policy. But more than that, the slow growth in agriculture and construction will also exacerbate the employment challenge in the economy.
The issue is not whether the economy is recovering but whether the recovery is a statistical artefact or signs of a sustained recovery. As of now, it appears that the real issues that led to slowdown of the economy continue to remain where they were. But what remains intriguing is the continued neglect of the structural problems of the economy despite clear evidence that these need to be taken care of on an urgent basis. Headline numbers from the quarterly estimates may give temporary relief to the government but are unlikely to lead to a sustainable path to economic recovery.
Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.