Coming within days of the UPA II report card, the GDP is at a rock bottom 5% and is a loud reminder of the inherent weakness in the Indian economy. Manufacturing, agriculture, services such as hotels have all slipped on the growth index. Clearly, the lack of investment in the country, by government, private corporations and foreign investors, is beginning to show up on the figures. India Inc’s ‘keep your hands off’ policy has meant less work in factories and a general quiet on building new assets.
Government cut in expenditure over the last year is also driving down growth. Not to mention, there has been an interest-averseness towards India by foreign direct investors (Ikea being an exception) due to corruption, politics and policy uncertainty. Cumulatively, the concerns of the last few quarters have now started reflecting on the GDP numbers. It doesn’t help that even the Planning Commission chief Montek Singh Ahluwalia says ‘there isn’t enough evidence of a strong recovery.’
There are two ways to look at this. One that this is a shocker, a 10-year low. But how low can it go? The other that may be this is the worst of it all. Sitting in Spain – where I am currently on a short fellowship – this growth seems like a power engine. For any Western nation, this is a sign of ‘boom.’ But for India, 5% GDP growth is a bit like going back to the mid 80s when we had plateaued out and didn’t promote the investment machinery to ricochet. Not to forget the massive workforce – mainly youth under 30- who need this progress to generate employment.
Compare the situation with the rest of Asia and the worries may deepen. China is growing at almost 8% and Indonesia (which threatens to replace India as the ‘I’ in BRICS) has been expanding by around 6%.
The health of corporations in India remains shaky. Profitability has improved sporadically but possibly marked by intense cost cutting or cyclical growth. One can’t miss the high degree of leverage some of these firms have. In addition, at the moment the only kind of borrowing that’s taking place is about refinancing of existing loans (in a bid to take on lowest cost loans and rid balance sheets of expensive debt) and not loans for fresh investment or industrial purposes.
So although some improvement has been reported in capital formation (fixed or large investment), it is a backlog that will take some time to catch up. Many projects ready to roll are lying unused. Some due to permissions, others because there is over capacity compared with demand. In case of power projects, there is no fuel to put them on-stream. How can a country of India’s size grow if a good chunk of its power plants cannot function due to lack of fuel such as coal and those that do supply power can only meet a part of the demand? Power shortage is a real reason that some industries do not even have the opportunity to run production even if there is actual demand. In case of roads, we are behind schedule on building them with efficiency and speed.
Unfortunately, all pending infrastructure, industrial production are closely linked to higher employment. Jobs have become a big concern as all of this is interlinked. The sooner we can revive infrastructure – big or small – we will be able to get people engaged in the growth process. There are some cyclical warning bells on agriculture. Growth once again is rather weak. Any economist will tell you India has missed the bus there and we leave its fortunes to the rain gods.
The crux of it all is that for a country the size and scale as India, it’s no good that we have low investment, low industrial growth, high inflation and hardly any job creation. This is a vicious cycle we need to break from. With the latest numbers for growth, expectations of a RBI interest rate cut (which helps spur consumer demand by lowering borrowing costs) have nosedived.
It’s a no brainer that boosting growth must be key for the Congress party to prepare a third comeback in the elections in May next year. Politics has over the last 24 months played games with growth prospects. India’s image of corruption and policy upsets has diminished its global ‘powerhouse’ image.
Of course, at the end of all GDP analysis, there’s that big hope. That the growth decline would have finally bottomed out. But the question is what are we doing to change the next number?