The bad news behind the good news

Mains Paper 4: Economy
Prelims level: GDP growth and estimation
Mains level: Inclusive growth and issues arising from it

Context

•  The higher-than-expected slowdown in the second quarter (July-September) gross domestic product (GDP) at 7.1% exposes many underlying weaknesses in India’s growth story, notwithstanding our obsession with the “fastest growing major economy” tag.
•  It also confirms that the celebratory mood in the government over the 8.2% growth in the first quarter (April-June) was premature and a repeat of a similar performance is hard to come by.

Finance ministry observation

•  The finance ministry’s estimate to touch 7.5% growth rate in 2018-19 after the first quarter number is likely to remain a dream, with most analysts paring their full-year growth projections closer to 7%.
•  The twin shocks of demonetization, when the government effectively rendered 86% of the currency in circulation not legal tender.
•  The roll-out of the goods and services tax that brought a large swath of the informal economy into the tax net while pushing economic growth down to a four-year low of 6.7% in 2017-18, may still be impairing growth impulses in the economy.
•  The GDP data was released on Friday on a day when thousands of farmers from across India held a protest march in Delhi demanding a special session of Parliament on debt waiver and better support for crop prices.
•  The steep hike in the minimum support prices by the central government in July has clearly not benefited farmers in getting remunerative prices for their produce.
•  On the contrary, there is a collapse in farm prices as reflected by lower nominal GDP growth in agriculture (2.8%) than real agricultural GDP growth (3.8%) in the September quarter.

Major implication

•  Such a statistical phenomenon last happened in the June quarter last year when farmers were protesting across India and six people were killed in police firing at Mandsaur in Madhya Pradesh.
•  More than the bad optics for the government, this reflects the poor condition of rural demand which is yet to revive and without which economic recovery is unlikely to be sustained.
•  The private consumption slowed down to 7% in the second quarter after picking up in the first quarter by 8.6% further underlines the attention the rural economy demands.
•  It is against this backdrop that the power struggle between the ministry of finance and the Reserve Bank of India (RBI) strikes a discordant note. And as jarring is the government’s move to recalibrate the back-series
•  GDP data to show that economic growth under the United Progressive Alliance was more anemic than records have shown.
•  Rather than try to score brownie points or wage ego wars, North and South Blocks would serve the nation better by trying to right the structural faults that bedevil the country.
•  Moreover, there is a pressing need for more outside voices within the corridors of power rather than a choir of cheerleaders if the administration is to be seen as composed of a talent pool of those who would speak truth to power than just a gaggle of yes-men.
   This holds good especially since the said pool has been depleted by the departures of Arvind Panagariya and more recently Arvind Subramanian, with the latter hinting that while he was the chief economic adviser, he was not kept in the loop on the decision to delegitimize the old ₹500 and ₹1,000 banknotes.

Way forward

•  The slowdown in the labour-intensive construction sector and the underwhelming growth in trade, hotels, transport services as well as financial services does not augur well for the job market, which needs to absorb about 12 million fresh entrants every year.
•  The drop in growth momentum, along with benign retail inflation, may prompt RBI to keep interest rates unchanged in its bimonthly monetary policy review on 5 December.
•  RBI will also be hard-pressed to explain its change in stance to “calibrated tightening” from “neutral” in the evolving growth-inflation dynamics.
•  The second half (October-March) of 2018-19 is also likely to see moderation of GDP growth on the back of lagged impact of higher interest rates and a liquidity squeeze faced by non-banking financial institutions.
•  The recent dip in crude oil prices and strengthening of the rupee, though, will stem further deterioration in growth, but they are unlikely to fully cover for prevailing weaknesses in the economy.
•  Instead of chasing $5-trillion and $10-trillion landmarks for the Indian economy, policymakers are better advised to address immediate bottlenecks to unshackle the true potential of the Indian economy.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Which among the following sectors is/are covered under the Index of Industrial Production (IIP)?
1. Mining
2. Manufacturing
3. Electricity

Select the correct answer using the code given below.

(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: D

Mains Questions:
Q.1) Rather than chase $5-trillion and $10-trillion landmarks for the economy, policymakers should address immediate bottlenecks. Critically analyse the statement.