Based on Government of India’s data, the government and the community of economists in India have come up with different narratives about the position of the Indian economy. In this post, Pronab Sen highlights the differences between the two narratives. He also expresses concern over the kind of response government is taking to combat the current economic slowdown, which is fully consistent with its own narrative and completely ignores the other. 

 “There are none so blind as they who will not see”

John Heywood (1546) 

The official view of the Indian economy was perfectly captured by our Prime Minister on 22 September 2019 at the “Howdy, Modi” event in Houston, US, when he asserted: “Everything is fine” several times in several different languages. True to form, various functionaries in government have elaborated on this theme to evolve what is now the government’s formal position on the Indian economy. The elements of this narrative are quite well-known by now, but they may be worth repeating as an aide memoire. Briefly they are:

1. We are currently experiencing some slowdown in growth (and not a recession), but India is still one of the fastest growing large economies in the world.
2. The growth slowdown is cyclical, and will correct itself quite soon as investments revive.
3. Agricultural prices are no doubt depressed, but that is because our farmers are producing more than we can consume.
4. Formalisation of the economy, including the number of taxpayers, has increased substantially due to demonetisation and GST (goods and services tax).
5. The financial sector is in a bit of trouble due entirely to imprudent lending (read ‘crony capitalism’) during the UPA (United Progressive Alliance) years, but it will bounce back with the ongoing recapitalisation process.
6. Foreigners are pouring money into India as reflected in FII (foreign institutional investment) and FDI (foreign direct investment) flows.
7. Our macro-fundamentals are strong:
• Inflation is under control.
• The current account balance is under control.
• The Centre’s fiscal deficit is under control.
• The stock markets are booming.

I could go on, but this is enough to start with. In marked contrast to this is the version that is by now widely accepted in the community of economists in India. The elements of this are:

1. India’s growth story is badly broken and a number of our neighbouring countries (Bangladesh and Vietnam, for example) are doing much better.
2. The growth slowdown is mainly structural and will not necessarily correct itself without appropriate government action to revive demand.
3. Rural distress is serious and clearly visible. Farmers are agitating on a regular basis, and rural non-agricultural employment is declining.
4. Unemployment in 2017-18 is at a 40-year high at 6.1%; and youth (15-29 years) unemployment is nearly 20%. Real wages have declined over the last three years.
5. Per person consumption expenditure declined in absolute terms in 2017-18 for the first time ever. Even food consumption has shown a decline.
6. The financial sector is in deep distress and neither liquidity injection nor recapitalisation will help as things stand.

How does one explain the stark contradictions in the two narratives? After all the data on which they are both based is the same; or are they? Well, the government’s approach has been to deny much of the economists’ narrative by attempting to suppress the data on which it is based. In particular, the data on employment and consumption have been targets of the government’s displeasure. Fortunately, some of these data have been leaked by elements within the statistical system, and thereby made available to us economists and the public at large. At which point the government has resorted to vilifying the provenance and quality of the data. The irony of course is that these data are the government’s own; and, to make matters worse, the experts appointed by the government to help discredit the data have stoutly desisted from doing so. The rest of the differences, in the government’s opinion, are just a matter of interpretation.

Let us then take up the ‘interpretational’ issue. The government sets much store by our so-called ‘strong macro-fundamentals’, and on the face of it they do look quite reasonable. But dig just a little bit deeper and it will be realised that these numbers are in fact signs of weakness, and not of strength as the government would have us believe. 

Inflation is indeed low and trending downwards. Initially this was driven by low, and sometimes negative, food inflation, which the government acknowledges, and is the principal cause of farmer’s distress.  However, this is certainly not because we produce too much food as the government insists. According to the World Food Programme, India ranks a very lowly 162^nd in the world in terms of per capita food availability.  The simple fact is that our poor simply cannot buy the food they need, and it has become worse in recent years. Now non-food prices have also started moving southwards; not because of lower production costs, but because of lower demand. As the Reserve Bank of India (RBI) has noted, capacity utilisation in Indian industry has dropped to a historical low of 68% in 2019. As things stand, large swathes of Indian industry are staring at deflation.

The current account deficit reflects a similar story. It has indeed been declining, but not because our exports are booming. In fact, exports have remained absolutely flat for the last six years, and have actually declined in the last three months. But imports have declined much faster. This would have been fine if the space vacated by lower imports was occupied by higher domestic production, but there is no sign of this happening from the data on industrial production. The conclusion is inescapable ─ this is yet another pointer to weak domestic demand.

The Centre’s fiscal deficit as reported by the government (3.5% of GDP) is certainly low, but unfortunately there is a smoke and mirror element to it. As the Comptroller and Account General of India (CAG) reported, the “true” fiscal deficit in 2017-18 was not 3.5% but was actually 5.8%, and it is more than likely that something similar holds true even today. So what is happening? The short answer is that the government is simply not paying its bills. Since government’s accounts are maintained on a cash basis, a bill not paid is treated as expenditure not incurred. That’s fine for the government and its budgetary numbers, but what about those who are owed the money? The states, the PSUs, the suppliers and vendors, the recipients of subsidies, etc. etc. Their budgets are in shambles. The government has simply shifted its own deficit onto the balance sheets of others who are far less able to finance this deficit.

What about the booming stock markets? Surely this is a reflection of the fundamental strength of our industry!  Sadly, not so.  First of all it needs to be realised that the stock markets represent only about 4,000 listed companies out of 1.3 million active companies registered with Ministry of Corporate Affairs and more than 60 million unregistered non-farm enterprises. It is, therefore, quite possible that the large corporates are doing fine even as the rest are in deep doldrums. Second, FII investments in the Indian stock markets are not determined so much by the absolute performance of the concerned companies, but by the relative performance of Indian corporates compared to their global peers. Finally, in the last one year or so the RBI has pumped in an enormous amount of liquidity into the economy through aggressive open-market operations (OMOs). Most of this money has not found its way into the banks and non-bank financial companies (NBFCs) to finance investment, but into speculative activities in the stock market. What we may be seeing, therefore, is a potentially unsustainable bubble, and not an affirmation of the strength of corporate India.

If this difference in the two narratives was merely an issue of public posturing, it would not matter very much. Unfortunately, the government’s policy response to the slowdown is fully consistent with its own narrative and completely ignores the other.  Thus its actions have been single-mindedly directed towards reviving investment through corporate tax cuts, lowering interest rates, increasing liquidity, and so on. The fact that investments are not going to revive without a perceptible upswing in consumer demand appears to have completely been missed.

Let me then sum up my views in a flight of poetical whimsy:

For them their world looks fine and bright,

Fire-flies in a moonless night