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January 8, 2017
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January 22, 2017

Across the aisle: Prepare for ‘slow down India’

The only engine that appeared to be running was government expenditure. In this scenario, what can be expected regarding the growth rate in 2016-17?

There are four engines of growth: government expenditure, private consumption, private investment and exports. Two of the engines — private investment and exports — have languished for many months. Private consumption was strong and kept the economy humming. Since November 8, 2016, however, private consumption has taken a severe blow, thanks to demonetisation. The only engine that appeared to be running was government expenditure. In this scenario, what can be expected regarding the growth rate in 2016-17

Loss of Rs 1.5 lakh crore

The answer has been provided by the Central Statistics Office (CSO) of the government that released the advance estimate of GDP for 2016-17. The estimate is based on data till October 2016, that is before demonetisation. The sobering conclusion is that the economy will slow down from 7.56 per cent in 2015-16 to 7.09 in 2016-17. That is a hit of 0.5 per cent. The conclusion is in line with other estimates, notably that of the RBI, which pegged the decline at 0.5 per cent. There is sufficient evidence that, post-demonetisation, the economy will slow down further. I am afraid that my prediction that the GDP will take a hit of at least 1 per cent in 2016-17 will come true. That is a loss to the economy of Rs 1,50,000 crore.

The CSO has covered its flanks by stating upfront that it has not taken into account the impact of demonetisation. The Finance Minister alone believes that the economy has not slowed down and that demonetisation will not affect growth in the current year (2016-17)!

In support of his claim, the Finance Minister cites the ‘robust’ growth in tax revenues up to December — 43 per cent in excise, 23.6 per cent in service tax, 10.7 per cent in corporate tax and 21.7 per cent in income tax. It is obvious that the Finance Minister is preparing the ground for aggressive Revised Estimates (for 2016-17) in the Budget that he will present shortly. It is also likely that he will present even more aggressive Budget Estimates for 2017-18. He is like the person who whistles when he has to walk alone in a dark alley! I shall reserve my comment on the numbers until after the Budget.

Stalling engine

For the present, I would like to focus on one of the engines of growth and what the CSO’s estimate tells us about that engine. It is the engine of investment. The critical number is Gross Fixed Capital Formation (GFCF), which is a measure of investments in the economy. The CSO estimates that GFCF will decline by 0.2 per cent in 2016-17. Actually, the decline will be steeper because, post-demonetisation, it is nobody’s case that investment was stepped up in November-December or is likely to gain momentum in January-March. (Incidentally, for most of the years of the UPA government (2004-2014), GFCF grew by double digits.)

A close look at the CSO’s estimates reveals that for three consecutive quarters the GFCF has shrunk compared to the corresponding quarter of the previous year, and the rate of shrinkage has accelerated:

2015 2016 (in percentage)

Jan-March 5.35 -1.90
Apr-June 7.11 -3.10
July-Sep 9.70 -5.59

We also have an estimate of investments by corporates. The data gives the change in net fixed assets. The picture is quite bleak. In the half-year ending September 2016, net fixed assets of corporates have shrunk across all major categories of sectors (see table).

Other dismal indicators

Both the government sector and the private sector announce new projects and the projected investments in those projects are tallied every quarter. Between Oct-Dec 2015 quarter and Oct-Dec 2016 quarter, the value of government sector projects that were announced declined from Rs 256,669 crore to Rs 42,128 crore and the value of private sector projects declined from Rs 119,475 crore to Rs 86,645 crore.

All other companion data confirm the slowdown in investment: Foreign Portfolio Investment turned negative at the end of December 2016 and credit growth has plummeted to an all-time low. One thing is abundantly clear: investments are dwindling in value. Besides, the rate of decline is extremely worrying. In this terrible situation, demonetisation will make things worse. It is axiomatic that if there is a decline in investments, it will cause a decline in the growth rate of the economy.

What this means for the common people is fewer jobs, more layoffs or retrenchment, low growth in incomes, and fewer people lifted out of poverty. Acche din is not around the corner, certainly not in 2017.