It is now almost official. Even economists close to the Government have started conceding that the growth for the 2nd quarter, due to be published on 28th November, is likely to be lower than the 5% recorded for the 1st quarter.
They are of course holding out the hope that in the 3rd and 4th quarters it will increase to 6.5 to 7.0 Percent. Now a 7% growth will indicate a 40% increase over 5%. A pipedream, if there ever was one.
In the 3rd quarter, of which half has already passed, there is no indication so far of any acceleration in economic activities. The momentous decision of reducing Corporate Tax has visibly ended in a whimper. One is tempted to put one’s head on the block and predict that growth in the 3rd quarter will also be around 5%. In the 4th quarter there may be a slight improvement if the February crop turns out to be exceptionally good.
So, in the year 2019-20, we will possibly have an annual growth rate even lower than the 6.1% forecast made by the Reserve Bank of India.
The Government is still in denial. The consumption survey report has been junked, but the leaked part only confirms what people have always known. Consumption is not growing; as a matter of fact it is declining.
But even a 5-6% growth in GDP is not bad by itself. We have lived with the Hindu rate of growth of 2-3% for decades. Why is it then that a 5-6% growth should cause so much concern, even alarm?
Perhaps we need to dissect the growth rate to see what it means for different classes of people. We also need to factor in the effect of growing economic inequality.
According to a World Bank Report, as of November 2016, India is the second most unequal country in the world after Russia. The richest 1% of Indians own 58.4% of the country’s wealth. The richest 10 % of Indians own 80.7 % of the wealth. This trend is going in the upward direction every year, which means the rich are getting richer at a much faster rate than earlier.
If in November 2019 the share of 10% of the richest Indians stand at 85%, it has increased from 81% to 85% in just the last three years. In other words, of a 6% annual growth 5.1% will be gobbled up by the richest 10%, leaving only 0.9%for the poorer 90% of the population.
It is true that the income distribution may not actually be as lopsided as the wealth distribution. But it is still expected to broadly reflect the same trend.
We also need to factor in another aspect. The GDP growth rates reported are supposed to be the real growth rates i.e. after correcting for the inflation.
Now, what if the inflation rate for a large no. of people, say, the poorer 50% is significantly higher than the official rate of inflation? Complaints about the official data on inflation have been there for a long time.
At a time of scarcity, the market price of an item (like onion today) at many places is higher than the official rate. Even if we ignore these complaints, the fact is that the retail inflation rate is a composite of the price rise recorded for diverse products divided into several groups having defined weightage based on average consumption.
For example, food is one such group. Now it is obvious that the lower your income is, higher is the proportion of your income that you spend on food. In other words, the weight assigned to food in working out the retail inflation rate is less than what it is for the poorest section of the people.
At this moment when food inflation at around 8% is considerably higher than the composite inflation rate, any increase in food cost causes more distress. Thus 1% growth in inflation will cause even greater distress to the poorest section of the people and may actually reflect a negative growth. This will be consistent with the fall in demand for biscuits and the fall in household consumption indicated in the recently junked consumption survey.
But the question remains. Why did low growth not cause as great a distress in the past as it does today? The answer perhaps lies in the increasing inequality. Despite a 2-3% growth in the early years of independence, the real growth for the poor was not lower.
To quote from the paper “ From British Raj to Billionaire Raj” by Picketty and Chancel : “Table 5 reveals that bottom 50% group captured 28% of total growth over the 1951-1980 period, vs. 49% for the middle 40% and 24% for the top 10%.”
The poorer 90% people thus had a 76% share of the growth. Thus appropriating an overall growth rate of 2.5% per annum for the period from 1950-1980; the share of the poorer 90% in national wealth was increasing at the rate of 1.9% per annum as against 0.9% expected for 2019-20.
Rising inequality is of course a global phenomenon, though it may not be as bad everywhere as it is in India. Perhaps this explains the current, the post-2008 weakness of the Global economy. When the purchasing power of 90% people is not increasing in any real sense it is unrealistic to expect a robust growth.
Some people are pinning their hope on the Stock Market. If Sensex and Nifty are doing so well, surely the economic scene cannot be all that bad? This may not be correct.
Firstly, both the indices represent too narrow a spectrum to be representative of the macro economy. Sensex for example is based on only 30 companies. Secondly, two factors entirely unrelated to economic performance are pushing up the prices.
Low interest rates on Bank deposits are pushing savings into Mutual Funds and the corpus of investible funds at their disposal are increasing and are pushing up the share prices. A similar thing is happening with the foreign funds. About a year back foreign financial institutions were net sellers in the share market. Today thanks to the US interest rate cuts, they have come back on a significant scale. However most independent people believe that both Nifty and Sensex are overpriced and thus a correction is inevitable.
The Government responses to the growing crisis reportedly are to further lower the interest rates, which will be an attempt to address a non-existent supply-side problem; and to cut down the individual income tax rates.
This will put some more money in the pockets of about 10% people, which may not go to increase consumption at all but may be invested in Mutual Funds. At the very least it will exacerbate the problem of inequality.
The broad answers to the problem at hand are clear enough. We need to put more money in the hands of the poor, which will boost consumption and we must restore people’s faith in the system, particularly the banks and other financial institutions.
The million Rupee question is, will the establishment bell the cat or remain in denial?
(The author is retired CMD of a PSU)