Opinion | When a juggernaut changes direction, it does so slowly

The GDP (gross domestic product) number controversy is hugely important for all those looking at stock market-linked returns for their money. Retail investors who are today pouring in almost ₹1 trillion a year, or about ₹8,000 crore a month, in equity funds, are basing their investments on Indian growth. That this 7-8% growth could have been false is cause for concern to these households. What happened to make them worry is this: India’s former chief economic adviser (CEA) Arvind Subramanian gave legs to the idea that India’s growth numbers were overstated in his paper, titled India’s GDP Mis-estimation: Likelihood, Magnitudes,Mechanisms, and Implications.

He used a set of 17 indicators that are strongly correlated to GDP growth to estimate it and found a 2.5 percentage point overestimation per year for a six-year period ending 2017 (across UPA-2 and NDA-1). That a loud and vocal set of people is willing to simply take this number of 4.5% GDP growth on the basis of one academic paper, setting aside the entire statistical machinery of India whose only job is to do this math using well-established processes and systems, points to a hurry in grabbing any evidence they can find to suit an agenda. If somebody has already decided that this government is wrong no matter what, then they use any piece of data—real or imaginary—to support that belief. The government is putting out its response.

But retail equity investors are worried. They should be because there is no question that the economy has been showing signs of slowdown, infrastructure financing is almost stalled, credit off-take is poor, private sector investment is not coming in, rate transmission is poor, the bad debt problem has spread to mutual funds and jobs are under stress. What’s going on? If I take a multi-decadal view from 30,000 feet, what I see is a story playing out where as the politics is changing, the economy is struggling to keep pace. Till 2014, there was a certain way of running the economy that led to a certain way of doing business. Inflating the economy to trigger growth and then using inflation to reduce public debt was one part of the policy toolkit. The use of bank funds as an ATM to serve the interests of the government in power was the other. This meant that the system knew that certain loans were not to be repaid because taxpayers’ money would recapitalize banks to compensate them for their eroded capital, allowing businesses to keep ever-greening loans. This easy bank money was used to gold-plate projects if the promoter was playing fair, and if not, funnelled through hundreds of shell companies to disappear. Why use bonds where each missed interest shows up if you have public money to dip into? Proximity to power was the currency and it kept the growth engine humming.

However, in 2014, the politics changed to something never seen before in India—a government committed to tackling corruption, bringing in a rules-based system and an attempt to turn the economy fully legit. A whole slew of measures were used to tackle this systemic problem from different sides—demonetization, goods and services tax (GST), giving teeth to the Benami Transactions Act, the crackdown on shell companies, Insolvency and Bankruptcy Code, 2016 or IBC, Real Estate (Regulation and Development) Act, 2016 or Rera, linking PAN (permanent account number) to Aadhaar, rule-based auctions—to name the major ones. Some measure found their mark, others like Rera are currently ineffective. But this tightening of rules meant that the way India does business has changed drastically and the system is struggling to decode the new way. Is this change really here to stay? Can I still find a loophole? Why turn legit when we’ve done business like this forever? Election 2019 answered those questions and the people who were waiting for the old way to come back with the old power structures have no option but to follow the new system. The pain in the economy we see is a juggernaut of the Indian economy changing course. This is the pain of turning legit. There is pain, there is disbelief and there is a slowdown.

Will we recover? That depends on the plan the government has to solve the stresses in the system. The stress of a credit squeeze, of real interest rates being far too high, of a freeze in infra financing, the problem of a legal system that needs an urgent re-haul (seriously, who, other than school children, goes for a summer, autumn, winter, Diwali and Holi vacations?), the crying need of a change in mindset of the babudom that still frowns on legit profits and believes that markets are a gambling den. As an equity funds investor myself, I see the GDP number controversy in this light: yes, there is a slowdown, and we should be concerned, but no, we do not take one academic paper and trash the entire statistical machinery of the country. Investors and planners who have used the GDP numbers given out by the government to make their equity return projections should not worry about the 4.5% GDP growth number estimated by the former CEA, but I would worry about the slowdown and hope the government has a plan in place to crank start the system.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation