In the last few days, the growth debate has been triggered all over again, thanks to ex-CEA Arvind Subramanian’s maverick statements, bordering on ignorance and mala-fide, irresponsible behaviour. That the ex-CEA should, after demitting office, in gross defiance of professional ethics, question the 7 per cent plus GDP growth in the 1st term helmed by Prime Minister Narendra Modi, is not the moot point. The moot point is, Mr Subramanian has chosen to cast aspersions on India’s tag as the world’s fastest-growing economy, by simply making an allegation, without backing it with logic or data, thereby making a failed attempt at tarnishing the credibility of the very institutions and processes he closely worked with, at one point. That the leftist cabal, driven by an anti-Modi agenda, should rubbish the CSO, CII, Niti Aayog and our statisticians, despite the fact that India’s position as the 6th largest economy in nominal terms has been well documented by both the IMF and World Bank, without so much as even bothering to question the veracity of the ex-CEA’s deviously mediocre claims, is hardly surprising. After the total annihilation of the anti-Modi, left wing brigade, in the recently concluded Lok Sabha 2019 elections, they will clutch at any straw that comes their way.
Coming back to the GDP debate, while the ten year UPA-era GDP growth was sub 7 per cent, under the Narendra Modi-led government, the GDP growth in Modi’s first term has been within arm’s reach of almost 8 per cent, with the CSO estimating real GDP at constant (2011-12) prices, to have come in at Rs. 141 lakh crore in 2018-19. Real GDP at constant (2011-12) prices, post the latest revisions for 2016-17 and 2017-18, likewise stand at Rs. 122.98 lakh crore and Rs. 131.80 lakh crore, respectively.
Further, the addition to GDP at current market prices during 2014-2019 is higher by over 28 per cent, than in 2009-2014. India’s nominal GDP grew by Rs. 59 lakh crore in 2009-2014, but with high inflation, in double digits, under a moribund Congress led UPA-2. In sharp contrast, under the Narendra Modi led government, nominal GDP grew by a far higher Rs. 76 lakh crore and more, between 2014-19, but with much lower inflation, averaging at barely a little over 4 per cent. Even fiscal deficit that was largely over 5 per cent under UPA-1 &2, was reined in at well under 4 per cent by the Modi dispensation, without compromising growth. Hence, the debate is settled – GDP growth, under the BJP-led Modi government was superior to the UPA-2 era, both in terms of sheer quantum, and the quality of growth too, something which Modi naysayers will never admit to.
The recent flippant statements by Arvind Subramanian, who said GDP growth was atleast 2.5 per cent lower in some years in the last 5 odd years of the Modi dispensation, without any supportive facts, but purely backed by vested conjecturing, has therefore, no validity. The revised GDP methodology adopted by the Modi government, has been explained in great detail in Sanju Verma’s book, “Truth and Dare–The Modi Dynamic”. Excerpts from this book, which form the basis of pointed rebuttals to Mr Subramanian’s flimsy claims, have been used in this column too.
Before proceeding any further, readers would do well to note that the Congress, which has left no opportunity to wrongfully accuse the Modi government of window-dressing numbers, has maintained a convenient silence on the fact that it was only thanks to the new methodology adopted by the Modi government, that the last 2 years of UPA-2 saw GDP numbers being revised upwards to 5.5 and 6.4 per cent, failing which, the average GDP growth for 2012-13 and 2013-14, under the Congress-led UPA-2, would have actually been well below an anaemic 5 per cent, under the old methodology. But then, hypocrisy and the Congress have been old friends!
Unlike several times in the past, when the base-year had been changed, with no protests or even a meek squeak from relevant stake-holders in 1970-71, 1980-81, 1993-94, 1998-1999 and 2004-05,the new base year adoption of 2011-12 by the Modi government, was met with musguided protests from several sections of the intelligentsia and a rudderless opposition, clutching at straws. The protests are however meaningless, as the new series has undergone changes which are aligned with the IMF and the UN system of accounts, in line with global best practices. In most developed countries including the USA, the base year is in fact, changed virtually every single year and they follow what is called a “rolling base year”. Hence if the Modi government rightfully changed the base year for GDP estimation from 2004-05, to 2011-12, why the brouhaha? It was in any case long overdue and is a welcome move!!
For example, since the new GDP revision represents the value addition in goods, it eliminates redundant goods and makes way for commodities currently under production. For instance, when computers replaced typewriters, the latter were taken out of the new updated back-series calculation. Similarly, in the communications’ sector, minutes of usage were adopted for calculations instead of subscriber growth, in the earlier series.
Plus, the ways in which we are using different commodities also change over a period of time. The things which were more important 5 or 10 or 15 years back may become less important, or what was less important may become more relevant now. So, when one is revising GDP numbers, we have to use those proxies or combinations that best interpret the evolving consumption and investment patterns in an economy and, that are precisely what the updated GDP series announced in November 2018 by the Modi dispensation has sought to do.
For instance, one such reinterpretation of data is for the telecom space. Here, the latest GDP series by the Modi government has taken into consideration the usage or minutes of use of telecom services, in place of the number of subscribers that was used earlier. For telecom, earlier, the number of subscribers was considered. Now, it has changed to number of minutes used. In effect, earlier, voice traffic or phone calls by the telecom subscriber base was a key reference point, but now, as everyone would agree, the growth in data usage and data traffic has been humungous, so it is only fair that this change in composition from voice to data and the very manner in which the telecom space has evolved, is rightfully captured. And that is precisely what the reconstruction of GDP with 2011-12 as the base year, has sought to achieve.
The 2011-12 base year takes into account additional and important changes in various sectors, particularly the changes related to manufacturing. Also, for instance, between 2004-05 and 2011-12, financial services data have undergone a drastic change because the banking sector has seen a growth explosion with an array of banking products which is reflected in the solid credit offtake numbers in retail loans, housing loans, personal loans and vehicle loans, even when the overall credit growth may have been relatively softer in the given years.
What Modi naysayers conveniently forget is that this 5.8 per cent has come, despite rising global protectionism, that in the last 6-9 months,has taken a turn for the worse, falling global trade amidst rising geopolitical tensions over a turbulent Brexit, Venezuelan bankruptcy, increasing tensions between the US and Mexico, US and Iran and ofcourse, no signs of trade wars between the US and China thawing anytime soon, with Trump blacklisting Huawei and slapping 25 per cent tariffs on $200bn worth of Chinese goods and services.
With US & UK reaching a tacit agreement to prevent Huawei from developing its 5G network, UK close to stagnation with many growth parameters at their lowest levels since 2012,manufacturing declining at a rapid pace in Germany, that has now reduced its full year GDP forecast to just 0.5 per cent from the earlier 1 per cent, stricter sanctions by US on Iran, escalating tensions in the Middle East and, China & Russia taking on the United Nations over the Sudanese issue, geopolitical mayhem globally, will ensure growth is tepid in 2019 and 2020.
Against this tumultuous backdrop, the World Bank sticking to 7.5 per cent GDP forecast for FY 2020 for India, with the RBI albeit a tad more conservative at 7,versus the earlier 7.2 per cent, bodes well. Also, after a 25bps reduction in Repurchase Rate (REPO), to 5.75 per cent by the RBI in its credit policy on 6th June 2019,in all, there has been a 75bps reduction in the REPO rate between February and June 2019 and, sooner than later, banks will be nudged into meaningful monetary transmission, if they don’t do it voluntarily. From calibrated tightening to neutral and now to an accommodative stance, showcases that both the government and the RBI are in sync and, determined to address liquidity related issues that some NBFCs are grappling with. System liquidity in early June at a surplus of Rs 66000 crore, Rupee closing at 69.27 to the Dollar and, 10 year 2029 government bond yield closing at 6.93 per cent on 6th June 2019,the lowest since November 2017,indicate that money markets and currency markets are in fine fettle and,Open Market Operations (OMOs), by the RBI to inject liquidity, with a Rs15000 crore OMO auction on 13th June 2019 itself, bears that out, in no uncertain terms.
Speaking of NBFCs, say a DHFL for instance, the downgrade by credit rating agencies and subsequent rout in its stock price,is part of a cleansing exercise that should be welcomed. Many NBFCs had massive Asset Liability Mismatch (ALM), issues which they ignored, despite repeated warnings by regulators and a correction in stock prices, long overdue, should now chastise them to stop “borrowing short and lending long”. To confuse therefore, the IL&FS or DHFL issues as “contagion”, is foolhardy. In the case of DHFL for instance, it is still very much a robust, cash flow generating, solvent company, that is temporarily caught in a storm, due to its inability to service short term debt obligations. It recently though, cleared Rs 962 crore worth of dues on outstanding Commercial Paper (CP) and, Non-Convertible Debentures (NCDs).
Liquidity stress in some pockets, cannot and should not be confused with a generic systemic crisis. The inter-bank money market continues to remain inherently strong, with the referral bank rate that acts as a crucial signalling point, at a mere 6 per cent and the REPO rate at its lowest level since July 2010.
Again, the extra leeway that the Modi government gets from falling crude prices internationally, cannot be ignored. With US 10 year bond yield slated to eventually touch 1.75 per cent in the medium term and global growth in the next one year slated to likely fall below the already downwardly revised IMF projected 3 per cent, India would stand tall even if it manages 7 per cent in 2019-20,as per revised RBI estimates. To mistake a cyclical slowdown as a structural one, abetted by global, rather than local factors, is like missing the woods for the trees. Modinomics, in the last five years, has in fact, laid solid foundations for a 10 per cent growth trajectory going forward and, the structural reforms initiated between 2014-2019,will eventually start bearing fruit, in more ways than one, under “Modi 2.0”.The best example of this is the fact that, for the third month in a row in May 2019,GST collections exceeded Rs 1 lakh crore.
If crude settles at $60/barrel or lower, that could well be the “alpha factor”, for the next phase of growth, moreso given the global oil glut, with US crude inventory stockpiles rising to over 483 million barrels recently. Recently, crude prices spiked up due to the attack on oil tankers in the Gulf of Oman. With Iran threatening to shut down the Hormuz Strait which accounts for roughly 40 per cent of global oil trade passage, which way oil prices will move in the short term is therefore, a million dollar question with no easy answers. However, based on pure global oil demand and supply dynamics, crude prices are structurally in bearish territory, which bodes well for India, which saves over a billion dollars, for every dollar fall in the price of international crude, other things being constant.
Also, with $455 billion slated to be wiped out from global GDP as per IMF, thanks to trade wars, net oil importing economies like India with a captive middle class of roughly 400 million, of which a large part are millennials, should outperform, driven by both domestic consumption and investment spending, which are structurally in a sweet spot, despite the cyclical peaks and troughs.
Again, in an economy as large and diverse as India, simply raising the alarm bell due to a quarterly decline in auto sales, is being prematurely pessimistic and wilfully naive. Passenger vehicle sales in the last few months took a beating, ahead of uncertainty pertaining to the arrival of monsoons and nervousness in some quarters about the election outcome. However, the thumping majority that has given Modi a second term and will lead to policy continuity and ofcourse, the Met department’s prediction of a normal monsoon, largely speaking, should augur well for auto sales, going forward.
Those fear-mongering about the slowing auto sales do not realize, that BS-VI emission norms that have to be complied with by 2020 and new “Axle Load” norms in the case of Commercial Vehicles (CVs),apart from higher third party insurance costs, are some of the reasons, why auto sales have taken a pause, recently. These factors are specific in nature and with auto makers and end users now adjusting to them, a robust revival in auto sales, is on the cards. Bajaj Auto and Hero Motocorp for instance, sold over 4 lakh and 6 lakh units respectively, in May 2019!Bajaj’s domestic sales growth at 29 per cent in fiscal year 2018-19,Ambuja’s 58 per cent standalone profit growth in the March quarter of 2018-19,Shree Cement’s EBITDA growth in excess of 20 per cent in the same quarter, FMCG behemoth, HUL’s domestic consumer business growing at 9 per cent, with EBITDA and profit growing at 13-14 per cent in the March quarter, ITC recording sales and profit growth of 13 and 19 per cent respectively in the final quarter of 2018-19 and ofcourse, HDFC Ltd’s standalone profit growth of 27 per cent in the fourth quarter of 2018-19,driven by net interest income growth of 20 per cent and, individual loan book growing in excess of 15 per cent, are all resoundingly vindicative of one simple fact— any economy that is facing a structural slowdown will never ever see its key corporates in the cement, two-wheelers, home loans and consumer goods’ space growing in healthy double digits.
The fact that, some of India’s biggest and best known corporates are growing in high teens and more, therefore, debunks any premise of a structural slowdown. Yes, some sections of the economy are facing a cyclical soft-patch but, that is a natural outcome of a high base effect and global headwinds. Falling bond yields and a stable Rupee with relatively superior GDP growth, versus global peers, will ensure that India attracts sticky and long term Foreign Portfolio Investment (FPI and FDI flows, which will more than compensate for any consumption or investment led slowdown in few select, cyclically sensitive pockets of the economy. For instance, in the first week of June 2019 itself, net FPI flows into India stood at Rs 7095 crore, after clocking Rs 9031 crore in May, Rs 16093 crore in April, Rs 45981 crore in March and Rs 11182 crore, in February 2019,in a ringing vindication of Prime Minister Narendra Modi’s reformist approach.
Also, let us not underestimate the far-reaching multiplier effects of schemes like “PMKISAN”, where over Rs 86000 crore to roughly 14.5 crore farmers, will, over time, based on the famous “Income Multiplier Effect”, boost aggregate rural incomes, demand and economic output. Even a textbook economist knows that thanks to the “income multiplier”, even a small injection by the government to increase disposable incomes, has the ability to disproportionately increase output and overall demand, within the domestic economy.
Coming back to the “GDP Debate”, the CSO said umpteen times, the divergence between old GDP numbers with 2004-05 as base year and the new updated version with 2011-12 as the base year, is on account of recalibration of the economy with the latest data sets. Also, in the mining and quarrying sector, regular annual returns of public sector have been used, instead of Indian Bureau of Mines data, used earlier.
The share of the secondary sector in total GDP/GVA, too, has increased in the new series, compared to the 2004-05 series. The increase is largely due to the use of new MCA-21 data and public-sector data in the organised electricity and manufacturing sectors, which was earlier sourced from annual reports of private electricity companies registered with the Central Electricity Authority and Annual Survey of Industries respectively, as per the CSO.
Again, in the 2004-05 base, the main data sources for unorganised sector were the NSS informal sector survey of 1999-2000 for the trade sector, unorganised enterprise survey results of NSS 63rd round (2006-07) for remaining non-financial service sectors, and the Employment and Unemployment Survey (EUS) of NSS 61st round (2004-05). In the 2011-12 base, the main data source for the unorganised non-financial service sector has been the result of unorganised enterprise survey of NSS 67th round (2010-11) and the NSS 68th round (2011-12).
Modinomics, needless to add, in the final analysis, is here to stay and its rock-solid foundations are cast in stone. Misguided efforts by Arvind Subramanian and many like him, to run down the phenomenal growth trajectory under the aegis of Narendra Modi, is an effort in vain. With the world struggling to achieve even a 3 per cent growth and India slated to do anywhere between 7-7.5 per cent, the debate is settled—India has, in the last five years and,will in the next five years, remain the growth fulcrum and the axis, that will lubricate the global growth engine.
Author: Ms Sanju Verma is an Economist & Chief Spokesperson for BJP Mumbai.