Higher govt spend key to greater growth

Although, the mid-year economic review made reassessment of the growth rates at 7 to 7.5 per cent in the current fiscal, it actually raises concerns over demand factor in the economy and the role of monetary and fiscal policy in dealing with the situation. With agrarian distress worsening further and suicides continuing, the government needs to boost public investment on a much larger scale in order to build infrastructure – both economic and social

Hyderabad: Notwithstanding the big claims on the growth of economy by the Narendra Modi government, the fine-print portrays altogether a different picture.

For instance, the government still maintains the real growth rate forecast at 7-7.5 per cent in its mid-year review, whereas the nominal growth rate is just 5.2 per cent. In fact, the government in its Economic Survey in February 2015 had estimated a growth in the range of 8.1-8.5 per cent.

While pointing out these anomalies in an article recently, CPM General Secretary Sitaram Yechury said that such a manipulating statistics may help hit global headlines but cannot strengthen the fundamentals of economy. He further points out that the government calculates inflation on the basis of WPI, which it claims to be minus 2.2 per cent. The real growth rate is calculated by discounting the rate of inflation from the nominal growth rate.

Hence, he argues that the real growth rate is higher than the nominal growth rate. To substantiate his argument, Yechury takes the authentic statistics from Reserve Bank of India, which clarifies that the private corporate performance slid during the second quarter July-September in 2015-16.

The fact remains that the numbers never lie. According to RBI’s non-government and non-financial companies performance report, which studied the performance of 2,711 companies, shows that the sales grossly declined by 4.6 per cent while the production was dented by 5.6 per cent. Even raw material and fuel costs also fell by 18.7 per cent and 4.2 per cent respectively.

However interestingly, the companies have posted decent profits, about 9.9 per cent during the second quarter. This amply explains that the companies have saved on the expenditure, although the economy will have a multiplier effect in the coming months which may show on the growth rate negatively.

On the other hand, the performance of the services sector, which was contributing highest to the GDP, has fallen by 33.9% in the aggregated net profits of about 450 companies, the RBI data shows. Thus, Yechury says that despite rate cut by almost 125 basis points, the consumption is not picking up.

When the Finance Minister himself states that the non-performing assets of public sector banks increased by over 25 per cent, it is further clear that employment generation by the manufacturing sector is declining, also bank credit declines by about 5 per cent.

Hence, the growth rate claims by the government should be taken with a pinch of salt. Although, the mid-year economic review made reassessment of the growth rates at 7 to 7.5 per cent in the current fiscal, it actually raises concerns over demand factor in the economy and the role of monetary and fiscal policy in dealing with the situation.

Reacting to the mid-year review on Friday, even the Chief Economic Advisor to Government, Arvind Subramanian, has expressed doubts about revenue collections, considering decline in the GDP growth. Already declining trend is visible in the manufacturing sector for the second quarter; adding to its impact is the state of the agriculture sector which has been under stress due to two successive poor monsoons.

Yechury thus feels that with the agrarian distress worsening further with suicides continuing, the government needs to boost public investment on a much larger scale in order to build infrastructure – both economic and social. This only would generate large-scale employment, which in turn improves purchasing power of people, expands domestic demand and provide impetus to the industrial growth.

What is nominal growth rate?

A measure of economic growth from one period to another expressed as a percentage and adjusted for inflation (i.e., expressed in real as opposed to nominal terms). The real economic growth rate is a measure of the rate of change that a nation's gross domestic product (GDP) experiences from one year to another.

Performance of non-government, non-finance companies

Q2 FY 15 Q2 FY 16

Companies 2,863 Companies 2,711

Sales Rs 8,107 bn 4.2% Sales Rs 7,517 bn (-) 4.6%

Production Rs 8,148 bn 4.2% Production Rs 7,479 bn (-) 5.6%

Raw Materials Rs 7,076 bn 3.4% Raw Materials Rs 2,994 bn (-)18.7%

Staff Rs 649 bn 7.7% Staff Rs 689 bn (+) 9.0%

Power & fuel Rs 297 bn 3.7% Power & fuel Rs 276 bn (-) 4.2%

a) The profit increased to 577 b (+) 9.9%, while in the first quarter the profit is (-) 9.5%

b) The profit increased to 537 b (+) 25.6%, which shows earlier year the profit is much less and in the subsequent period the companies are managing similar profit, though there is a negative performance.

By KVVV Charya