It’s Recession, agree economists and warn that worse is yet to come

It is no more a case of economic slowdown. The Modi govt thinks supply side interventions can reverse demand depression. But when have fever medications healed bone fractures?

It’s Recession, agree economists and warn that worse is yet to come

Tathagata Bhattacharya

Union Finance Minister Nirmala Sitharaman, as recently as November 18, claimed that the country is on track to reach the $5 trillion GDP target by 2025. She added that although the economy has slowed down, it is still projected to grow at the fastest pace among G-20 nations this year. However, nothing could be further than truth. The problem with the Indian economy is no more about a slowdown in growth. There is de-growth. The Indian economy is in recession.

“You see, a 5 per cent growth in Quarter 1 of the current fiscal area is still reasonably healthy if you compare to other significant countries. But even that will have to be accompanied by figures which show rises in investment, consumption and output. However, these figures are all negative. Unemployment is at a record high. Capacity utilisation is falling. Business confidence is down as evidenced by investment figures. My calculations tell me that the GDP actually came down by a percentage point at least,” says Arun Kumar, retired Professor at the Centre for Economic Studies and Planning (CESP) at Jawaharlal Nehru University (JNU) and a leading authority on Black Money.

Kumar’s assertions are well-founded. The unorganised sector contributes 47 per cent to India’s GDP and employs almost 94 per cent of the country’s workforce. And data on the performance of this sector is collected once every five years. The farm sector’s performance is enumerated twice a year, after the Rabi and Kharif harvest. Conclusive data about industrial output is collected once a year. Data on the service sector, which accounts for almost 60 per cent of the GDP, is collected once every five years.

So the methodology of quarterly GDP growth rate calculation is largely based on an estimation process, which economists called interpolation. In the mathematical field of numerical analysis, interpolation is a type of estimation, a method of constructing new data points within the range of a discrete set of known data points. It assumes that the old data trends hold true. And therein lies the problem.

Surajit Das, Assistant Professor at CESP, JNU, says, “The biggest fallacy of this interpolated figures probably came to light in the two quarters that followed Demonetisation of high-value currency notes in November, 2016. The government claimed that in the next two quarters, i.e. Jan-March and April-June, Private Financial Consumption (PFC) rose by 11 and 10 per cent respectively, which was clearly not the case. I will say the current quarterly GDP growth rate as claimed by the government suffers from asymmetric bias which stems from interpolation.”

The key reason for India’s troubled economy is a collapse of demand. Himanshu, another prominent economist and academic, says, “Unless the government intervenes and pumps in huge amounts of money in rural India, the situation will go from bad to worse. And it is doable. It is a question of priorities. Instead of giving Rs 1.45 lakh tax break to corporates, if the government invests that money in capital expenditure in the rural economy, that will boost rural demand and jumpstart the economy. The attitude of helping the corporates at the first sign of economic trouble needs to change.”

The Mahatma Gandhi National Rural Employment Guarantee Act was supposed to act as a sure-fire cushion to protect India’s rural poor from penury. But unpublished data collected by India’s National Statistics Office (NSO) and accessed recently by Business Standard shows that between July 2017 and June 2018, rural consumer spending fell by 8.8 per cent and urban consumption grew by a mere 2 per cent. The last time real consumption fell, according to NSO reports, was in 1972-73 which was precipitated by a global oil crisis. An average Indian spent Rs 1,501 a month in 2011-12. In 2017-18, it fell to Rs 1,446, indicating that people, especially in rural India, had less money to spend. But then, has MGNREGA failed in its objective?

Surajit Das does not feel that. “Studies have revealed that in the last financial year, the rural working population got 51 days’ work on an average at the wage rate of Rs 179 per day. Remember under the Right to Work, they are entitled to a minimum of 100 days of work. They are not even getting the market wage rate which is exactly double of that of MGNREGA wage rate plus they are getting 49 days of less work. Without MGNREGA, one shudders to think what the situation in rural, agrarian India would have been,” he says.

Arun Kumar points out that slowdown in urban growth has led to a phenomenon of reverse migration that has seen millions of rural working people go back to their villages as the cities can’t provide enough jobs. “Demonetisation hit the unorganised sector so hard. Lots of workers in MSMEs lost their jobs. Lots of small businesses, predominantly cash run, shut down. It is again the MSME sector that has been the hardest hit by the NBFC crisis. They are going back to their villages in increasing numbers and consequently, the demand for MGNREGA work has shot up. That is why you see the MGNREGA allocations witnessing repeated upward revisions,” he says.

The massive drop in volume sales as witnessed by FMCG and auto sectors are a blowback of the chaos created by the double whammy of Demonetisation and GST. While MSMEs, which principally deal in cash, can’t claim input tax credits, they nonetheless have to shell out more for raw materials and other supplies. The large number of farmers, factory workers, etc who were the main buyers of tractors, entry-level cars and two-wheelers, have been left high and dry.

It is pretty evident that supply side interventions like giving tax breaks to corporates is not going to reverse demand depression. It is well established that the rural poor in India spend proportionately more of their income than the rich. Increase of corporate profits does not lead to expansion of the domestic market. Higher growth can only come from increased consumption, and mainly from rural India.

Himanshu points out another alarming fact. “Even the urban middle class is facing the heat with retrenchments, pay cuts, etc. Savings rate that used to be around 22-23 per cent a few years back has come down to 15-16 per cent which shows that people are dipping into their savings,” he says.

There are many who point out that the fiscal deficit crisis is a handcuff on the government’s ability to invest in large infrastructure and capital investment projects in rural India. However, nothing could be further than the truth. Fiscal deficit is the difference between expenditure and revenue divided by GDP. Research has shown that every Re 1 invested by the government in capital expenditure leads to an additional Rs1.22 in tax revenue. So, effectively, spending more on infrastructure and other capital expenditures in rural areas will not just increase revenue but will add to the GDP as well, actually leading to lowering of fiscal deficit.

Arun Kumar agrees while adding, “But the government is not walking the talk. It announced Rs 100 lakh crore in capital expenditure over the next five years which boils down to Rs 20 lakh crore per year. But this year’s allocation is only Rs 8.5 lakh crore, less than even half of that. This Rs 100 lakh crore investment is just another hollow announcement, just like doubling farmers’ incomes by 2022 and the economy reaching the $5 trillion mark by 2024-25. None of these will become reality. The situation, I am afraid, is likely to worsen.”

Maitreesh Ghatak, Professor at London School of Economics, says consumption boost can only be triggered “by increasing government expenditure that will boost incomes in the hands of people and that would in turn result in rising consumption demand. Increased spending in Infrastructure, more allocations for MGNREGA and expanding the PM-Kisan scheme to include non-farmers are some of the ways this can be done.”

Arun Kumar agrees. “Pumping money in rural infrastructure, education and health will put money in the hands of those operating in the unorganised sector. That is where the problem lies,” says the veteran economist.

Along with these, Surajit Das also advocates the universalisation of the MGNREGA, i.e. extending it to cover the urban poor, something Kumar also supports. Himanshu says the MGNREGA wage rates should be doubled to Rs 360 per day per person to match the market wage rate. While calling this a bare minimum, Das says that even this market wage rate was fixed some five years back. They all seem to agree that minimum 100 days’ work has to be given to people to reverse the demand depression.

Increased spending in health and education, called social wages in the parlance of economics, will also allow the rural poor to allocate a higher proportion of their earnings to other consumables. That can kickstart the economy.

But it seems the government’s treatment of the malaise, or perhaps its diagnosis, is fundamentally flawed. It seems it is prescribing fever medications for a case of bone fracture. Arun Kumar explains, “The corporate tax rate is not going to help at all. Neither will giving Rs 75,000 crore to recapitalise banks and Rs 25,000 crore to the real estate sector. The rural or urban poor do not buy these flats. The problem lies in their sunken demand. Recession is here. The later the government recognises it, the graver will the situation become.”

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Published: 22 Nov 2019, 2:21 PM