Opinion | Don’t let statistics get in the way of economic reconstruction

It’s best for the next government not to assume that capital efficiency explains our GDP numbers

It all started with a perusal of the Twitter handle of my good friend Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center in New York. He had a chart or two showing the strong correlation between two economic trends in India: real gross domestic product (GDP) growth scaled by investment share of GDP, and real returns on the Bombay Stock Exchange Sensex. Both were trending upward in the chart he had posted on 24 April.

In his view, the chart pointed to capital efficiency in the Indian economy. The idea was that efficiency of use of capital corresponded to high stock market returns. If GDP growth was high relative per unit of GDP dedicated to investment, it meant high capital efficiency. That is a good hypothesis or interpretation. My first thought on seeing the chart was that real GDP growth rising faster than investment share of GDP and correlated with real stock market returns meant an asset price and consumption-led economy.

Let us take International Monetary Fund (IMF) data (World Economic Outlook database) on real GDP growth in Brazil, China, India, South Africa, Turkey, Indonesia, and Russia since the dawn of the new millennium. In all cases, I divided the time period into three: 2003-07 (unsustainable boom); 2009-13 (alleged recovery) and 2014-18 (cold shower).

In general, three countries show relatively low variability in the average annual real GDP growth in these three periods. They are India, Indonesia and Turkey. However, with the sole exception of India, all the other countries show small or big declines in the average growth rates from one period to the other, with the worst being the most recent one (2014-18). The most glaring ones in terms of steep declines in average growth rates are Russia, Brazil and South Africa, which are dependent on commodity exports. The post-2008 global recovery was a phantom one in developed countries. No real investment recovery took place. Hence, prices of industrial metals, crude oil and other raw materials have been in a state of stupor. On top of that, Brazil and South Africa have also been wracked by corruption scandals and the consequent paralysis in governance.

Parenthetically, the real economic growth data for these seven emerging economies make the notion that the 21st century belongs to the East risible. The West, despite all its problems on wealth and income inequality and political polarization, remains the top dog. These issues plague emerging economies too. Further, technological developments with respect to robotics and Artificial Intelligence are beginning to facilitate re-shoring of manufacturing to the West. The Financial Times article Rise of the Robots Threatens Developing World Workers (1 May 2019) is an important read and an early warning on this.

India is the only country that shows a higher growth rate between 2014 and 2018 than between 2009 and 2013. That would have been credible if high- frequency and other indicators vindicate the economic growth numbers or the capital efficiency argument. They don’t. Profitability ratios of non-government, non-financial corporations have remained stagnant over these years. There is excess inventory of unsold homes and automobiles. Credit growth to industries is absent and investment intentions of the private sector do not show signs of bottoming out. Growth is being led by consumer spending, facilitated by home loans. Credit card debt is growing at nearly 30% per annum. Economic growth led by consumption spending facilitated by consumer debt is not the stuff of capital efficiency.

On top of these, the government undertook structural reforms such as introduction of the goods and services tax, the Insolvency and Bankruptcy Code, the Benami Transactions (Amendment) Act and the Real Estate (Regulation and Development) Act. All of these reforms, welcome and essential as they are, need behavioural adjustments on the part of businesses and households, with short-term adverse consequences for economic growth. Thus, economic growth was bound to be lower. Even with 5% to 6% real economic growth, India will have done far better than other countries, including China, in the group, given the substantially better macroeconomic stability with which such a growth outcome would have been achieved.

The next government must reflect on the changed global economic landscape. The export pie is not growing. Export growth has to be earned by grabbing market share through productivity gains and improved competitiveness. Public sector banks must be cleaned up with greater ruthlessness than before along with greater governance autonomy and higher capital. India also needs its term-lending institutions revived. These will enable credit to flow to those who have sound balance sheets and can invest.

There is plenty of international evidence that capital formation is not a function of lower cost of capital and that credible and competent leadership is an economic stimulus in itself. All these become possible if one accepts that India’s economic growth data has come in the way of commencing a true recovery.

V. Anantha Nageswaran is dean of IFMR Graduate School of Business (KREA University).These are the author’s personal views