Skip to main content

Need for corrective action (hindu)

Revised estimates show that demonetisation hurt, but a deepening investment slowdown remains the challenge

India’s economic growth estimates lately seemed out of sync with the dampened feel-good sentiment in the economy. The GDP was growing at a world-beating rate, the stock market was booming, but little on the ground suggested that people were feeling better off. Consumption and investment behaviours suggested probably not. So when in February this year, the state statistical apparatus estimated that the impact on the economy of demonetisation was muted, doubts were cast on its credibility.

Dissonance between the statistics and ground reports considerably reduced in the latest released batch of data into which the updated Index of Industrial Production was plugged in.

The GDP data for the fiscal year 2016-17 present a sharp picture of the state of the economy. GDP growth has slowed for the first time in five years, in 2016-17, to 7.1%. The economic recovery that was gathering pace year after year abruptly lost speed last year. Corrective action should help the economy regain the lost momentum. Quarterly estimates show that demonetisation certainly hurt the economy, but growth impulses had started weakening six months earlier. A thorough understanding of the slowdown’s causes will be crucial to the choice of policy tools.

Demonetisation’s disruption

Demonetisation’s damage is discernible in the last two quarters of 2016-17. It is more pronounced in the later one, when from January to March this year, coinciding with the peak cash crunch, gross value added (GVA) grew at its slowest pace in at least eight quarters. The loss of momentum is considerable. Growth slumped to 5.6%. Just four quarters earlier it was a robust 8.7%.

Construction and manufacturing, crucial sources of jobs, have been most severely affected. The GVA growth received a boost from agriculture that benefited from last year’s good rains and Government spending, largely immune to demonetisation. The growth in the rest of the economy, minus this contribution, was barely 3.8%. In the same quarter a year ago, this was 10.7%.

Given the extent of the disruption, a sharp, sustained reversal in GVA growth looks difficult. Projections of a quick bounce back seem optimistic. At the time demonetisation was announced, GVA growth had been on a downward slope. It had decelerated in the two quarters preceding demonetisation. The shock dragged it further in the next two quarters. From the peak of 8.7% in the January-March 2016 quarter, it lost momentum consistently, decelerating for four straight quarters.

Risks to the recovery

In the boom years during the United Progressive Alliance government’s tenure, four engines had powered the economy. Of those, just two were still running before demonetisation: government investments and private consumption. The other two, exports and private investments, were, and remain, out of steam. Demonetisation briefly killed the third, private consumption. As the cash crunch eases, consumption will probably revive. But the risk to the recovery is from the credit crunch that demonetisation worsened.

Credit growth plunged to a multi-decade low as banks were devoted to exchanging notes that ceased to be legal tender. This overburdened banks and took attention away from the pressing problem of bad loans, the impact of which is visible in the continuing slide in the gross fixed capital formation, a measure for investments. Decreasing for the fifth straight year, the share of gross fixed capital formation in GDP shrunk to 27.1% last year. It was 34.3% in 2011-12.

Investments, the principle engine of growth, remain unresponsive to macroeconomic stimulus. The government stepped up its public investments, even deferring fiscal deficit targets, but the increase is more than offset by the fall in private investment. Liberalising foreign investment policies and improving the ease of doing business has not pulled the economy out of the investment slowdown.

The message in the revised estimates relevant to policy decisions is that unresolved bad loans are restricting banks’ lending capacities, which is choking investments.

Investment slowdown

The investment slowdown is neither a recent development nor has data captured it for the first time. The government has so far played a passive role, first by relying on banks, and now on the Reserve Bank of India, to tidy up the bad loans mess. Unless addressed on a war footing, the credit crunch could stall the economy’s recovery. The quicker the banking sector recovers its health, the speedier will be the pullback. The stress, if unattended, will limit the effectiveness of the monetary support of lower interest rates.

Since the economy was on a smooth recovery path for the last four years, the slowdown should probably no longer be ascribed to the policy paralysis that characterised the dying years of Prime Minister Manmohan Singh’s government. The fresh bout of pain in the economy is to a great extent a fallout of decisions — both that were taken and those that should have been taken but were not — of Prime Minister Narendra Modi’s government.


Popular posts from this blog

SC asks Centre to strike a balance on Rohingya issue (.hindu)

Supreme Court orally indicates that the government should not deport Rohingya “now” as the Centre prevails over it to not record any such views in its formal order, citing “international ramifications”.

The Supreme Court on Friday came close to ordering the government not to deport the Rohingya.

It finally settled on merely observing that a balance should be struck between humanitarian concern for the community and the country's national security and economic interests.

The court was hearing a bunch of petitions, one filed by persons within the Rohingya community, against a proposed move to deport over 40,000 Rohingya refugees. A three-judge Bench, led by Chief Justice of India Dipak Misra, began by orally indicating that the government should not deport Rohingya “now”, but the government prevailed on the court to not pass any formal order, citing “international ramifications”. With this, the status quo continues even though the court gave the community liberty to approach it in …

Khar’s experimentation with Himalayan nettle brings recognition (downtoearth)

Nature never fails to surprise us. In many parts of the world, natural resources are the only source of livelihood opportunities available to people. They can be in the form of wild shrubs like Daphne papyracea and Daphne bholua (paper plant) that are used to make paper or Gossypium spp (cotton) that forms the backbone of the textile industry.

Nothing can compete with the dynamism of biological resources. Recently, Girardinia diversifolia (Himalayan nettle), a fibre-yielding plant, has become an important livelihood option for people living in the remote mountainous villages of the Hindu Kush Himalaya.

There is a community in Khar, a hamlet in Darchula district in far-western Nepal, which produces fabrics from Himalayan nettle. The fabric and the things made from it are sold in local as well as national and international markets as high-end products.

A Himalayan nettle value chain development initiative implemented by the Kailash Sacred Landscape Conservation and Development Initiati…

India’s criminal wastage: over 10 million works under MGNREGA incomplete or abandoned (hindu)

In the last three and half years, the rate of work completion under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has drastically declined, leading to wastage of public money and leaving villages more prone to drought. This could also be a reason for people moving out of the programme.

At a time when more than one-third of India’s districts are reeling under a drought-like situation due to deficit rainfall, here comes another bad news. The works started under the MGNREGA—close to 80 per cent related to water conservation, irrigation and land development—are increasingly not being completed or in practice, abandoned.

Going by the data (as on October 12) in the Ministry of Rural Development’s website, which tracks progress of MGNREGA through a comprehensive MIS, 10.4 million works have not been completed since April 2014. In the last three and half years, 39.7 million works were started under the programme. Going by the stipulation under the programme, close to 7…