Pacing the economy

A word of caution is also relevant. Bothering about the decimal points in GDP growth figures or in case of inflation or IIP is misplaced. For a large economy of our size, the numbers are not that accurate to start hair-splitting arguments about decimal point changes. What is important is the direction. Compare the rounded 6 per cent growth this first quarter with last year's 8 per cent, when read with the growth figure of say the previous quarter, there is a clear pointer that the economy is slowing. So then, the more sensible thing to do should be to assess how and why it is so. In this aspect the details are relevant.

The disaggregated figures of GDP are more interesting from this point of view than the overall national income growth as such. These disaggregated figures give insight into what is wrong with the Indian economy at present and what needs to be done to put the economy on a higher growth trajectory.

While there is an evident slack overall, the slowing down is acuter in certain sectors. The slackness in the performance of the manufacturing sector, which grew by a meagre 1.2 per cent, stands out. This stands in stark contrast to the Prime Minister's call for manufacturing growth in the country. A couple of years back, Prime Minister Modi had given a call for "Make in India" during his Independence Day speech. Ever since we have been talking about the growth of manufacturing within the country. This was also supposed to create millions of jobs for the unemployed youth of our country, which was a priority, but that has not yet happened.

If we juxtapose this slackness in manufacturing growth with another figure given in the latest GDP release, then there is possibly some clue. Final consumption expenditure in the GDP has remained more or less stable at around 58 per cent of GDP. This would obviously include expenditure on manufactured goods when the overall income is growing.

With rising GDP and stable final consumption expenditure, a good part of the consumption expenditure is on imported products. On the basis of some reports from the industry, over 10 per cent of paper consumed is imported and for tyres, this goes up to as much as 20 per cent. If we look into the consumer durable goods, like electrical appliances, the imported component would be much higher. This is something that the government should concentrate on and measures should be initiated to check the rising levels of manufacturing imports.

The other corroborating evidence from the GDP figures that everything is not alright could be gained from the fact that gross fixed capital formation (GFCF) remains subdued. GDP figures indicate that the gross capital formation has been below the levels in the last few years.

The rates of GFCF at current and constant (2011-2012) prices during Q1 of 2017-18 are estimated at 27.5 per cent and 29.8 per cent, respectively, as against the corresponding rates of 29.2 per cent and 31.0 per cent, respectively in Q1 of 2016-17. This will also mean that the capital goods sector would be languishing. This corroborates the general perception that investment is not happening in the Indian economy. Overall growth is directly proportional to the amount of fresh investment.

Industry sources have complained that fresh investment is not being committed because the industry is operating at low levels. Capacity utilisation is around 70 per cent and thus there is no incentive to invest in the creation of fresh capacity. At most, some brown field investments are occurring which is providing an incremental push to the industrial output.

A reference to the debate on interest rate is in order here. A constraint towards fresh investment is the prevailing rates of interest. If interest rates are high then, apart from the financing costs being higher, the expectations about future rates of return are also high. At 8 per cent interest rate, the expectation of a rate of return of at least 12 per cent is expected to make a project viable. If the interest rate is itself plus-10 per cent, the expected rate of return would have to be around 15 per cent. That often drives prospective projects making them look formidable.

Additionally, the manufacturing and mining sectors, two basic pillars of any economy, are not growing for physical constraints. Both mining and manufacturing growth means the allocation of land for these projects. However, the current land laws and environmental laws are making fresh investment impossible as no fresh plots of land are available for industrial investment. These are some of the basic issues which have to be addressed if manufacturing sector has to grow at a reasonably fast pace.

While the Union government can take some steps in remedying the current state of affairs, these remain mainly at the hands of the state governments. At least land allotment for new industries is in the hands of the states and populism of the state governments stands in the way. Most of the economists, however, have blamed the Modi government for the current slowdown in the industry citing that last year's move of demonetisation had singularly hurt the Indian economy and slowed down its pace. They have also stated that the introduction of GST had now also acted as a brake on the domestic industry and its performance. These appear as best only as alibis for the fundamental reasons which are affecting the Indian industry and its businesses.