Wednesday, December 30, 2015

How Modi Sarkar has failed the Indian Economy

The Indian Economy grew at just 7.2% in the first half of the financial year 2015-16, while it grew at 7.3% in the entire financial year of 2014-15. The economic growth remained flat in the 19 months of the Modi Government

There are four key components which contribute to aggregate demand growth-the most visible symptom of economic health – private consumption, private investment, government investment (focusing on government expenditure) and exports. Unlike the boom years 2004-12 where the economy was driven by all four components of demand, the striking difference about this year is that the economy is driven only by private consumption and to an extent by government investment. The two other factors of ‘private investment’ and ‘exports’ have remained sluggish leading to a drag in growth.

Private Consumption:

Private consumption has been the bright spot in the economy. This has been emphasized in the‘Mid-Year Economic Analysis’ recently released by the Ministry of Finance.

“In 2015-16, if oil prices remain at about US$50 per barrel for the Indian basket for the rest of the year, the average oil price decline will be about 40 percent. This positive term of trade shock to the Indian economy would amount roughly to 2.2 percentage points”

Directly (household purchase of petroleum products) and indirectly (higher corporate margins passed on to consumers as lower prices and higher wages and salaries to government officials), about half of this could lead to higher private consumption.

In fact, According to the figures released by Ministry of Petroleum, Global Crude oil price of Indian Basket was US$ 33.33 per bbl (as on December 17, 2015), so going by that logic the positive impact on the Indian economy would be more than just 2.2 percentage points and the private consumption should increase. One important point to ponder is as to whether the real benefits of these lower prices are being passed on to consumers or not?

Private Investment:

Another factor which resulted in the drag of growth was – private investment. Why is the private investment weak? The balance sheets of corporate India have been highly stressed. According to an analysis done by Credit Suisse (which is based on 11000 companies) there is a large debt accumulated by certain corporate groups since 2012.

Reserve Bank of India (RBI) governor, Raghuram Rajan, highlighted the problem almost as soon as he took over in 2014.

Two data points are relevant in this context:

A fifth of the listed non-government, non-financial companies are now categorized as leveraged. These are companies that have a negative net worth or a debt-equity ratio of more than two times. And 15% of these firms fall in the “highly leveraged” category. The proportion of both leveraged and highly leveraged companies has risen between September last year and this year.

In the unlisted universe, data for which is only available till the end of the financial year 2014, about a quarter of the firms (both public limited and private limited) fell into a category defined as “weak”. These are firms that have an interest coverage ratio of 1.

Government Investment:

Although the Government claims that that its investment has been on an upswing, with an increase by about 29%, since the previous 2 quarters, but this supposed positive contribution of public investment, is offset by a combination of lowering of other expenditures and higher tax receipts. This factor has had little effect on the demand in growth.


The fourth important factor which impacts the demand of growth is the weakness of exports. Exports from India showed a declining trend for 12 months in a row. Exports during November 2015 stood at $ 20.01 billion, 24.43% lower than $ 26.48 billion during November, 2014 and $21.35 billion in October 2015.

The trade deficit for November 2015 was $9.78 billion, down 39.74% from $16.23 billion in November 2014. The deficit was $9.76 in October 2015.

However, the most recent data suggest that neither India’s exports nor imports have lost any significant global market share till atleast the end of 2014. Thus, declining exports seem to be predominantly determined by a decline in global demand. But this preposition may be considered with a pinch of salt.

So let us now examine some key economic indicators which are driving the Indian economy at this juncture:


The first three quarters of the financial year (FY) 2015-16 have shown robust growth both in terms of GVA (Gross Value Addition) and GDP, which at constant market prices has improved. Economic growth, prima facie, too is showing signs of steady recovery. The latest GDP estimates suggest in the first half of 2015-16 it grew at 7.2 percent as compared to 7.5 percent in the first half of FY2015. In contrast, nominal GDP growth declined substantially from 13.5 percent in first quarter of FY2015 to just 7.4 percent in the first quarter of FY2016.

As discussed earlier, private investment and exports are being a drag on the demand of growth. The Mid-Year Economic Review has lowered the growth projections to 7-7.5% in this financial year from 8.1-8.5% projected at the start of the year. Even more importantly, the review’s recommendations on action implicitly suggest that growth next year could further slow down.

The Reserve Bank in its annual financial stability report (FSR), flags “risks arising from erratic climatic conditions, limited policy space, corporate performance…and low investment growth…could pose challenges”

The remarkable thing about 2015-16 growth performance is that it continues to be as strong as it is given the weakness of exports (because of declining world markets) and private investment. In the boom years, exports were adding 1.9 percentage points to demand whereas in 2015-16, export demand has been negative (-1.1 percentage points).

The difference with the boom years, on account of exports is thus 3 percentage points. Similarly, private investment contributed 3.2 percentage points and only 1 percentage point in the current year. These two components of demand should have reduced growth by 5.3 percentage points. And yet, actual growth is only 2-2.5 percentage points less.

Reforms initiatives could provide the stimulus for fresh investment, which should translate into greater private investment.


Inflation has continued to moderate steadily. Consumer price inflation has declined from 5.4 percent in February 2015 to 5 percent in October 2015. The WPI has been in negative territory for 12 months since November 2014 and is in negative at (-) 3.8 percent in October 2015. In an irony of sorts, the Government perhaps takes pride that Rural wage growth and minimum support price increases—important determinants of inflation—have remained muted.

The recent decline in WPI inflation was broad-based and mainly due to falling fuel prices. As fuel has proportionately larger weightage in WPI, the decline in fuel prices led to a sharper fall in WPI as compared to CPI. Fuel and manufactured products account for the bulk of decline in WPI. Inflation based on Consumer Price Index which remained sticky around 9-10 per cent during 2012-14 moderated to 5.9 percent in 2014-15 and further to 4.6 percent in 2015-16 (April-October)

This striking wedge between the two has been rising steadily and reached unprecedented high of 8.5percentage points in the second quarter of FY2016. 

Price Rise in Pulses

Inflation in pulses has seen a phenomenal rising trend in the current year although general inflation has declined. WPI and CPI inflation in pulses which was low at -10.7 and 0.6 per cent respectively in October 2013 increased to 53 per cent and 42.2 per cent respectively in October 2015. The contribution of pulses to CPI inflation also increased to 19.4 per cent in October 2015 from a low of 0.1 per cent in October 2013.

While overall sowing of pulses is more than last year, that’s not the case for crucial crops such as Tur (Arhar) because of dry spells in Maharashtra, Uttar Pradesh and Karnataka, which are the key growing areas. The most affected crops are Tur (Arhar), Jowar and Soybean.

Pulses, production has suffered due to lower output in 2014, damages due to unseasonal rains and hail storms in March 2015 and shortfall in sowing (especially Tur) this year. As a result, inflation in pulses stands at an average 20% this year so far, with August inflation crossing 25%and surging to 42% for Tur. It surged to 160% in September and 201% in first week of October.

Fiscal Deficit:

The country has witnessed robust growth, low inflation, manageable current account deficit and prudent fiscal management in the first half of the current year. However, low inflation has also meant that the GDP growth in nominal terms is lower than what was projected at the time of  preparing the Budget. This, along with lower than expected receipts from disinvestment proceeds, could make the achievement of fiscal targets challenging.

Though the fiscal sector registered some notable successes, it is also true that the decline in nominal GDP growth relative to the budget assumption will pose a challenge for meeting the fiscal deficit target of 3.9 per cent of GDP. Slower-than-anticipated nominal GDP growth (8.2 percent versus budget estimate of 11.5) will itself raise the deficit target by 0.2 percent of GDP. The anticipated shortfall in disinvestment receipts, owing to adverse market conditions for a portfolio that largely comprises commodity stocks, will add to the challenge.

Infrastructure and Industry:

As per the latest national accounts estimates of GDP for the second quarter (July-September) of 2015-16 indicated earlier, manufacturing registered a growth of 9.3 per cent compared to 7.9 per cent in the corresponding quarter of the previous year. This revival in the overall growth of the economy is reflected in the growth of index of industrial production (IIP) as well. While there are better and more reliable indicators of industrial activity available, it is the IIP with its limitations, which is available on a monthly basis with a lag of 42 days and as such is useful in indicating the broad trends.

The eight core infrastructure supportive industries, with an overall weight of 37.9 per cent in IIP, registered a year on year growth of 2.3 per cent during April-September, 2015-16 as against the growth of 5.1 per cent during the corresponding period of the previous financial year

The decrease in growth rate during April-September, 2015 can be attributed to lower growth in electricity, coal and cement sectors and negative growth in steel and natural gas sectors.

Refinery products registered positive growth, crude oil sector has shown marginal increase in growth and fertilizers sector has shown an impressive growth in April-September, 2015 as compared to the corresponding period of the last year.

The major listed mining companies in the private corporate sector grew by 8 per cent and 5.4 per cent respectively at current prices in quarter one (Q1) and quarter two (Q2) of 2015-16.

The key constituents of mining sector, namely, production of coal, crude oil and natural gas grew by 0.9 per cent, 1.7 per cent and 0.5 per cent during Q2 2015-16. Coal had grown by 7.3 per cent in Q1 2015-16. The mining sector, thus, needs to gain momentum to keep pace with the increasing requirements of the economy.


The state of the economy is a matter of grave national concern.The GDP growth has been almost flat; investment sentiment is poor as apparent from virtual non creation of Capital Assets, and there has been a sharp escalation in the Debt to GDP Ratio.

Despite benign rate of inflation and achievable fiscal targets, there has to be a word of caution for the growth trajectory, which is evident from the fact that growth figures have been downgraded to 7-7.5% now, even in the Government’s official Mid-Year Review. The initial optimism of the Economic Survey which was presented in the beginning of the year has faded. Even the World Bank has indicated that it will have to relook at India’s macro-economic estimates and probably downgrade the growth figures

For 12 continuous months the merchandise exports have been in a free fall resulting in loss of tens of thousands of jobs in the Manufacturing Sector. A Government that had come to power promising 2 Crore jobs annually has led us to a situation, which is characterized by mounting job losses and abject failure to reinvigorate economic growth. This has led to despair and despondency amongst the youth.

This Government, has managed to achieve the dubious distinction of messing the economy despite the fact, that it has got the unprecedented and windfall advantage of a historic low in the prices of international crude. However, leave apart passing the benefits of these low prices to the consumers of the country, the Government has increased the central excise on petroleum products seven times to fill its coffers.

Overall, the Narendra Modi Government has failed the nation's expectations when it comes to its economy. 

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