8 December 2015

2015 has been a year of economic gloom for India. Just look at the numbers

No matter what the government says, the economic outlook is bleak.
Though the financial year has some ways to go, the end of the chronological year is when we traditionally go through the routine of taking stock. To many who watch the economy closely, this year is significant because the nominal gross domestic product growth rate has fallen to a 10-year low of 5.2%. We mostly judge our economic performance by real GDP, which is adjusted for inflation, unlike nominal GDP. As a result, nominal GDP often appears higher than real GDP.

Whenever and wherever business people meet, the conversation invariably veers to flattening sales and falling profits despite the government crowing that real GDP is growing at 7.4%. But nominal GDP growth rate is a better measure of current market prices.

For much of the past decade, India’s nominal GDP growth was in the 10%-15% range, as also was corporate profitability growth. Since inflation used to be in the 4-8% range, real GDP was in the 6%-9% range. The problem with the present year is that nominal GDP – the GDP before inflation – has fallen to a low of 5.2%, and since inflation (wholesale price index) has become negative 2.2%, real GDP is at 7.2%. But the popular mood is determined by profitability and not by economic legerdemain.

Now consider this. If inflation were positive, the real GDP growth would have been less than 5.2%. It is during periods of optimism and buoyancy that prices, sales and profits rise, all of which implies some inflation. That’s why most economists, businessmen and politicians maintain that moderate inflation levels are needed to drive consumption, as higher levels of spending are crucial for economic growth. A modest inflation is always good for the system, like good cholesterol. The problem with inflation is when it becomes rampant.

Tweaking the numbers

To get some idea about how much we are hurting, consider this. Nominal Gross Value Added is the measure of the value of goods and services produced in an area, industry or sector of an economy. In the first half of 2014-’15, nominal GVA was at 13.7%. In comparison, in the first half of 2015-’16, nominal GVA is 6.2%. At the same time, inflation was almost 5% last year and it is a negative 2% this year. This deflation has been primarily caused by the global collapse of commodity prices. Prices of oil, steel, copper, aluminum and coal have fallen to their lowest levels in years.

Commodity price collapses signal a much larger global slowdown. Often, they are a two-edged sword. Falling oil prices have reduced our oil import bills but they have also contracted our export markets, leading to a slowdown in them. Further, the global glut of steel following China’s diminished appetite for the metal has put pressures on our domestic steel producers and caused a major fall in iron ore exports. The effects of this on the domestic economy sectors have been huge.

In the real world, nominal growth matters much more than the inflation-adjusted real growth. To a firm’s revenue – whether from realisations from current sales or projections for future, cash flows and investments – real growth hardly matters. For the government too, nominal growth matters because tax revenues are affected by deflation – the decline in direct tax collections is a sign of this.

As it is, the GDP growth rate was tweaked a bit by the government in February 2015 to put India on a higher trajectory, giving itself an added 2.2% growth as a bonus. If this were done in the last year of the Manmohan Singh government, growth would have been a good-looking 6.9% instead of the dismal 4.7% calculated. It means that in the year and a half since United Progressive Alliance government went out, the GDP has grown a mere 0.5%. But this government claims a healthy GDP growth of 7.4%, allowing it to crow about outpacing China.

The 2010-’11 GDP growth was calculated based on factor costs, which was changed to constant prices to take into account GVA in goods and services as well as indirect taxes. Besides, the base year has been shifted to 2011-’12 from 2004-’05 earlier. This revision has led some economists, including Reserve Bank of India Governor Raghuram Rajan, to seek “more clarity”.

Industry watch

For more perspective, look at the automotive and construction sectors, the bellwethers of economic prosperity.

At least in the automotive sector, there is mixed news. The industry produced a total of 14.25 million vehicles, including passenger vehicles, commercial vehicles, three-wheelers and two-wheelers, in April-October 2015 as against 13.83 million in April-October 2014, registering a marginal growth of 3.07% year-on-year. The car companies have dispatched about 2.33 lakh cars in November compared to 2.11 lakh units in the same period a year ago. Until October 2015 tractor sales continued to fall for the 13th consecutive month. For the first seven months of 2015, tractor sales fell by 19.5%. But the real indicator of widespread buoyancy is the two-wheeler industry. The news here is not so good. India’s largest two-wheeler maker, Hero MotoCorp, posted near flat sales, while its nearest rival, Honda Motorcycle & Scooter, domestic sales fell nearly 12%.

The construction sector is one of the largest seasonal employment providers in India next only to agriculture, creating more than 45 million jobs either directly or indirectly. The demand projections promise a healthy outlook for this sector. The shortage of urban houses stood at 18.8 million units in 2012, and it is expected to grow at a compounded annual growth rate of 6.6% for 10 years till 2022, when it will reach 34.1 million.

However, developers in the country’s property markets have been struggling with slow sales, high unsold inventory, delayed construction and stalled projects. The real estate market has been among the sectors worst hit by the economic downturn which, coupled with high interest rates in the face of persistent inflation and delays in securing mandatory government approvals, has kept wary homebuyers away for the last couple of years.

Rising inventory levels in a country where housing shortage is such a critical issue indicates that the supply that is available is unaffordable to many. For instance, Mumbai has a projected shortage of 2 million homes, but is unable to sell half its inventory pile-up because of unaffordable prices. Home sales in Mumbai dipped 9% to 28,446 units and new launches dropped 47% to 18,887 units. The country’s largest property market, the National Capital region, has a pile-up of inventory that would take close to 78 months to clear at the current pace of sales. Unsold inventory in NCR rose 12.63% to 235,908 apartments from a year ago. Clearly, the sector needs a more liberal credit policy to encourage families to invest in property. Indian investment or Foreign Direct Investment is not the issue. Yet the government seems focused on attracting investment, when the problem is to generate demand.

No reason for cheer

Gross non-performing assets of banks grew to 4.8% as of the quarter ended September, from 4.4% in the previous three months, according to the domestic rating agency ICRA. According to Finance Minister Arun Jaitley, gross NPAs of state-run banks rose 25.19% year-on-year to Rs 3.14 lakh crore in September 2015, constituting 5.64% of total advances. Consequently, banks’ credit growth dropped to a multi-year low of 8.8%. Of this, credit to industry declined to 4.9%.

The cause and consequence of this is that manufacturing activity in India slowed to a 25-month low in November, pulled down by higher input cost inflation. The Nikkei Manufacturing Purchasing Managers’ index declined to 50.3 in November from 50.7 in October. The index has fallen for the fourth consecutive month. A reading above 50 on this survey-based index denotes expansion.

Ironically, the data came a day after the Central Statistics Office released the GDP data for the September quarter that showed a marked 9.3% increase in manufacturing in the period. But if that were so, bank credit to industry too should be keeping pace, which it is not.

This is the season of celebration. But there seems to be less reason for cheer. We can tweak data and present them in a way that is optically better. But, as they say, the proof of the pudding is in the eating. And the people are not biting. Whether it is cars and motorbikes, or homes.

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