Tag: india economy growth

Union Budget 2023 Cleverly Camouflages Its Real Intent

Without doing much, the government can claim that it has given to all the marginalised sections. It has also created a façade to hide the benefits that it grants to the well-off sections.

The Union Budget for 2023-24 has come at a time when the economy is ostentatiously doing well but is actually facing challenges both internally and externally. The unorganised sector is suffering due to the policies the government has been pursuing for some time. Externally, the war in Ukraine and the ongoing ‘New Cold War’ are adding to the problems. Both these challenges needed to be addressed in the Budget. Unfortunately, that is not in evidence.

The external challenges are hard to address because India does not exert the kind of influence on the world economy to mould it to suit its requirements. At best, it can try to minimise the challenges that will come its way, especially if the Ukraine war persists. For that, it will have to focus on strengthening the Indian economy.

The internal challenges are due to the nature of the growth and its extent, high unemployment, rising inequity and persisting inflation. The budget needed to address these.

Also Read: Eight Charts to Make Sense of Budget 2023

Budget is populist of a different kind

Growth has been in the organised sector at the expense of the unorganised sector, which is declining. The latter is being colonised by the former. Also, this is resulting in a lower growth rate than what the official figures indicate. The government is happy that the Indian economy’s rate of growth is the highest among the major economies and feels that it can continue as it has been doing.

Actually, after a shock to the economy, it is not the growth rate that matters but the level of the GDP. India’s official GDP now is only 8% more than the GDP in 2019-20 (pre-pandemic). In other words, the economy has grown an average of 2.8% per annum. The state of the economy is yet to recover to where it was pre-pandemic. Since this growth has come from the organised sector while the unorganised sector is declining, actually the economy has not grown at all. That is why unemployment is high, and consumption and investment levels have not recovered to the earlier levels. The Budget needed to tackle these factors, but does not.

It is a populist Budget, not the way financial analysts understand this term but in the real sense. For financial analysts, a populist budget is one that allocates funds for the poor and gives subsidies to them. The populism of this budget is that it is apparently giving to every section of society – women, tribes, Dalits or farmers and MSMEs. But, announcements have real content only if adequate amount of funds are allotted for each of them. 

People buy vegetables at a market. Photo: PTI

Low stimulus for growth

If these announcements were for real, the overall expenditures would have risen sharply. But at Rs 45,03,097 crore, the total expenditures will rise by only 7% over the revised expenditures in the current year. This is less than the projected 10.5% growth in nominal GDP. Thus, even if more is allotted to some schemes, it will be at the expense of some other schemes. 

Further, the budget should have been used to stimulate the economy’s growth. With such a small increase in the budget allocations, that will not happen. The allocations should have risen by much more than 10.5%. Further, it is the primary deficit that adds to the demand and stimulates the economy but that is set to fall from 3% of GDP to 2.3%.

The financial experts set store by the increased capital expenditures planned in the budget. That will be helpful but not as much as is required. Most of this increase is in the big projects – highways, railways and so on. Most of these are capital-intensive and will hardly generate much employment. They will of course help big businesses by boosting demand for the organised sector. Instead, the capital expenditures for rural areas and for employment generation required a boost. 

Unfortunately, the allocation for MGNREGA is cut from Rs 89,400 crore in the revised estimates to Rs.60,000 crore next year. Further, rural development allocation has been reduced from Rs 2,43,317 crore in the revised estimate to Rs 2,38,204 crore. Of the total budget expenditure, it is getting 5% and that shows the low priority of the government for the rural sector.

Thus, the budget is not going to stimulate growth of the economy, which is needed to take care of the various ills.

Also Read: Budget 2023 Is Optimistic But Indifferent to Past Failures

Inequality will grow

If growth remains negative for the unorganised sector, then they will suffer a substantial loss of income. This will be far greater than any allocation for them in any new schemes now announced. The government’s show of concern for their welfare will prove to be mere words. The continuing high inflation is another tax on them which will lower their standard of living since they are not able to bargain for higher wages.

The budget is lowering the direct tax rates for the well-off and they do not need that. Their incomes have been rising as the organised sector is doing well at the expense of the unorganised sector. Their stock market wealth has shot up in spite of the overall economy not doing well. So, they also benefit from the wealth effect. They needed to pay more tax so that more public goods could be provided in the country and that would benefit the marginalised sections.

A wealth tax could have been initiated. It is frowned upon by financial analysts. They argue that the rich are generating wealth due to their own effort and should not have to bear higher taxes. They treat it as extortionary. They also buttress their argument by saying that this tax failed earlier. The tax became infructuous due to the large number of exemptions given. Vertical equity suggests that a wealth tax should be levied in the economy. Further, it has been shown to be the most efficient way of raising taxes. 

It could be used to reduce indirect taxes, which are both regressive and inflationary. They are also the most inefficient way of collecting taxes since they are stagflationary. Largely leaving the wealthy untouched leads to a low tax/GDP ratio, which prevents increasing expenditures on public goods like education and health. These sectors are also employment generating.

In brief, the budget is drafted with an eye on the nine state elections in 2023 and the coming general election next year. Without doing much, the government can claim that it has given to all the marginalised sections. It has also created a façade to hide the benefits that it grants to the well-off sections.

Arun Kumar retired as professor of economics, Jawaharlal Nehru University.

Three Reasons Why This Year’s Economic Survey Is a Political Document

If ordinary citizens were hoping that this year’s survey has an honest stocktaking of the ground reality of the economy, they are in for disappointment.

New Delhi: As is the norm a day before the Union government presents the annual budget in parliament, the Economic Survey for the year 2022-23 was released by the Union Ministry of Finance on Tuesday, January 31.

The document is a summary that outlines the state of the economy in a fiscal year. With the monthly household expense bill on an upswing, with people you know in your respective fields losing jobs post-pandemic and no help arriving till now, one doesn’t need to be an economist to decipher data and graphs to crystalise the view that the economy has been on a rough patch for some time now. Therefore, a common citizen who otherwise leaves the economy to the economists may take a peek at the government’s 2022-23 Economic Survey. Perhaps with the hope that there is an honest stocktaking of the ground reality, helping you get a grip on the state of affairs that directly affects your personal budget, Maybe there is also an expectation that the government would lace it with some degree of optimism and hope for better days.

The survey does throw up ‘optimism and ‘hope’ in oodles, but what comes across after perusing the document that presents the survey “in a nutshell to enable its easier understanding” through “charts, infographics, tables and minimum use of text” is not a paper on the state of the economy but a stridently political one aimed at creating a smokescreen that all is good in ‘New India’.

The survey seems to reiterate what the Narendra Modi government is increasingly pushing for – keeping the 2024 general elections in mind – the dawning of Amrit Kaal or a ‘Golden era’.

What particularly stands out in the document is the attempt to portray the ‘golden era’ of the Modi regime since 2014 as a continuation of the ‘India Shining’ era of the A.B. Vajpayee government.

To better understand this push, take a look at the infographic below that draws a parallel between two fiscal periods – 1998 to 2002 (Vajpayee era), and 2014 to 2022 (Modi era).

Source: Economic Survey 2022-23

It begins with ‘shocks’ that the economy received during those two periods when the Bharatiya Janata Party (BJP) was in power. For the Vajpayee government, the shocks began with the nuclear tests in 1998, which attracted international sanctions. The document underlines the two droughts (in 2000 and 2002) that the period had also witnessed, before mentioning the ‘technology bust’ (dotcom crash of 2000) triggering a period of recession in the US economy, and 9/11’s effects on India. It is another matter that the Vajpayee government had come under fire from the opposition for its slow response to the 2000 drought, which affected western states like Rajasthan and Gujarat. Vajpayee also made a televised appeal for financial help from citizens to address the crisis.

Under the ‘shocks to the economy’ section for the 2014-2022 period (the Modi era), the infographic puts not just the negative effects of the pandemic “followed by inflation” and “global commodity price shock followed by tightening of financial conditions”, but also a “period of banking, non-banking and non-financial corporate sector balance sheet stress.”

While the survey lists structural reforms such as “asset recovery for the banks”, “privatisation” and “interest rate deregulation” as Vajpayee’s efforts to bring the economy on track, the list of reforms undertaken by the Modi regime is a long one. Apart from Goods and Sales Tax (GST), more privatisation of government assets and tax reforms, the vaccine roll-out is also touted as “reform”. Bizarrely, ‘structural reforms’ to improve the economy apparently also include concepts like ‘AatmaNirbahar’ (self-reliance) and ‘unique identity’. Is the ‘unique identity’ launched to bring a structural change to a grim economy a synonym for ‘New India’ or ‘Amrit Kaal’ or both?

That this year’s economic survey is fundamentally a political document that comes in the wake of the Modi government presenting the last full budget before the 2024 elections is evident from this infographic.

One, it handpicks only two periods in recent Indian economic history – the Vajpayee and Modi eras – in a bid to establish a “right-wing economic trajectory”.

Two, it attempts to frame the narrative that ‘Amrit Kaal’ is but a continuation of the ‘India Shining’ phenomenon. Perhaps this narrative is aimed at adding weight to the impression that the BJP as a party is always for ‘national security’ (read the nuke test), even if it comes at the cost of the economy. Does it then help the Modi government to also juxtapose that its ‘nationalist’ agenda is at the top of every decision, even before the economy? If so, it clearly gives the incumbent government an easy exit from the tight spot it has been in for some time now for not doing enough to rectify the dwindling economy.

The third reason why the survey is a political one is the complete ignorance of the times between 2002 and early 2014, which put money in people’s pockets during the Manmohan Singh era. This decision is clearly a no-brainer – set in motion only to underplay what it can’t contest. An indirect reference to that period is made in the ‘Growth Returns’ section, stating that the structural reforms carried out by the BJP government between 1998 and 2002 “paid growth dividends from 2003 onwards”. The economic trajectory of a country, much like foreign affairs, is a continuity; one government’s policies may help or harm the subsequent period but rarely in India does one notice an attempt by any government to compartmentalise one government’s financial decisions as distinct from that of the other based on their political ideology. The Modi government, in doing so with this Economic Survey, has certainly set a new precedent.

RBI Hikes Lending Rate by 35 Basis Points, Cuts FY23 GDP Growth Projection to 6.8%

Even as the central bank called the Indian economy a “bright spot in the otherwise gloomy world”, it lowered its estimate of GDP growth to 6.8% in the fiscal ending March 31, 2023, from an earlier forecast of 7%.

New Delhi: The Reserve Bank of India (RBI) on Wednesday raised the benchmark lending rate by 35 basis points (bps) – the fifth increase since May – saying it remains focused on bringing down the inflation to a tolerable limit.

Even as the central bank called the Indian economy a “bright spot in the otherwise gloomy world”, it lowered its estimate of GDP growth to 6.8% in the fiscal ending March 31, 2023, from an earlier forecast of 7%.

It, however, kept the inflation forecast unchanged at 6.7% for the current fiscal and projected it to come down below the upper tolerance limit of 6% in the fourth quarter of the current financial year.

The Consumer Price Index (CPI) based inflation, which RBI factors in while fixing its benchmark rate, stood at 6.7% in October. Retail inflation has been ruling above the RBI’s comfort level of 6% since January this year.

RBI governor Shaktikanta Das said the central bank remains “nimble and flexible” in its approach to dealing with the price situation.

The six-member monetary policy committee (MPC) headed by RBI Governor raised the key lending rate or the repo rate by 35 basis points to 6.25%.

With the latest hike, the repo rate or the short-term lending rate at which banks borrow from the central bank has now crossed 6%.

This is the fifth consecutive rate hike after a 40 basis points increase in May and 50 basis points hike each in June, August and September. In all, the RBI has raised the benchmark rate by 2.25% since May this year.

Consequently, the standing deposit facility (SDF) rate is adjusted to 6% and the marginal standing facility (MSF) rate and Bank rate to 6.50%.

The MPC also decided to remain focused on the withdrawal of the accommodative stance to ensure that inflation remains within the target going forward while supporting growth.

The panel also decided by a majority – 5 out of 6 members – voted to increase the policy repo rate by 35 basis points while Jayanth R. Varma voted against the hike.

Das also said the overall liquidity remains in surplus, with average daily absorption under the liquidity adjustment facility (LAF) at Rs 1.4 lakh crore during October-November compared to Rs 2.2 lakh crore in August-September.

On the inflation outlook, the governor said it is expected to be at 6.7% for the current fiscal.

Concerning economic growth, the RBI has slashed its GDP forecast to 6.8 per cent from an earlier estimate of 7% for the current fiscal.

“Growth remains resilient in such a hostile environment… inflation in India is lower than other countries,” he said, adding even at the lower GDP growth rate, India will remain among the fastest-growing major economies.

In its last bi-monthly policy review released in September, the RBI had slashed the economic growth projection for the current financial year to 7% from 7.2% earlier on account of extended geopolitical tensions and aggressive monetary policy tightening globally.

Full Text: Pronab Sen on Why Q2 Growth Numbers Aren’t Cause for Celebration

EMIs to rise as consequences of repo rate increase

The RBI’s decision to hike the repo rate by 35 basis points will raise prospects of EMIs for home, auto and other loans rising further. The previous four increases totalled 190 bps, with the last three hikes being 50 bps each.

Announcing the monetary policy committee’s decisions, Das said the main risk is that inflation could remain sticky and elevated.

“The MPC was of the view that further calibrated monetary policy action was warranted to keep inflation expectations anchored, break core-inflation persistence and contain second-round effects,” he said.

Acuite Ratings and Research said the RBI’s stance has remained moderately hawkish, and there exists a possibility of a further round of rate hikes in February next year, with a potential terminal rate of 6.5% by the beginning of FY24.

The pass-through of higher rates to home loans may start to impact the demand for housing, particularly in the mid to high-ticket segment, it noted.

India posted a GDP growth of 6.3% in the July-September quarter, slightly better than expected but less than half the 13.5% growth in the previous three months.

“The focus on the inflation fight continues. There will be no let up in that,” Das said.

He said food inflation is likely to moderate with the usual winter softening and the likelihood of a bountiful rabi harvest, but pressure points remain in the form of prices of cereals, milk and spices in the near term.

For the Indian economy, Das said the outlook is supported by good progress of rabi sowing, sustained urban demand, improving rural demand, a pick-up in manufacturing, a rebound in services and robust credit expansion.

(With PTI inputs)

Watch | We Face ‘Very Difficult’ Economic Situation, Matter of ‘Great Concern’: PMEAC Member

Rakesh Mohan tells Karan Thapar that unemployment – or poor levels of employment including under-employment – is the most serious problem India faces.

In an interview to discuss the state of the economy – focusing specifically on growth, investment, unemployment, poverty, inflation and the state of the rupee, a member of the Prime Minister’s Economic Advisory Council (PMEAC) says that India faces “a very difficult situation” which he adds is “a matter of great concern”.

Rakesh Mohan, who is also a former deputy governor of the Reserve Bank of India (RBI), says it’s hard to say with precision or conviction what would be the GDP growth rate this year because of the impact that the enormous international uncertainty may have on India. The uncertainty, he added, is more than it has been for the last four-five decades. However, Mohan believes that if Quarter 2 growth, which will be released in the next few days, is between 6.1 and 6.3%, then growth this year should be somewhere between 6.5 and 7%. However, if Q2 growth is lower than 6.1%, overall growth for the year could fall below 6.5%.

Mohan identifies India’s declining investment rate as one of the important concerns behind the Indian economy’s growth performance. He says we don’t know why the investment rate has declined from 39.1% in 2007-2008 to 32.2% in 2019-2020 nor do we have a clear idea of what needs to be done to boost it back. However, he is hopeful that the sharp lowering of bank non-performing assets, the improvement of company balance sheets as well as the recent increase in capacity utilisation will see the investment rate rising over the next 4-5 years which, in turn, should lift the economy’s growth.

In a tour d’horizon interview with Karan Thapar for The Wire, Mohan said that the MSME sector, which represents 30% of the economy and perhaps 45% of employment, is a sizeable section of the economy about which we do not know much. We don’t have data and our only knowledge is anecdotal or based on what we see. He believes the MSME sector has suffered seriously during the COVID-19 pandemic and it’s hard to say what its condition is today. He believes it has suffered far more than the formal sector.

In the interview, Mohan identified unemployment or, as he put it, poor levels of employment including under-employment, as the most serious problem India faces. He says the private sector is simply not doing enough to generate jobs and government capex on infrastructure is unlikely to create sufficient jobs.

Mohan said it does look as if India’s recovery from the economic impact of COVID-19 and its present-day growth is K-shaped.

Speaking about inflation, Mohan said that he believes the RBI should continue to raise interest rates to tackle inflation, particularly because the real rate of interest is still negative.

Speaking about the rupee, which is presently trading between 81 and 82 to the dollar, Mohan said the rupee should be allowed to decline because that would encourage exports and help accelerate growth whilst the corresponding increase in the cost of imports would provide an incentive to industrialists to produce equivalent goods in the country. He believes that the RBI has spent far too much of India’s reserves shoring up the rupee. Over the last ten months approximately, the reserves have shrunk by over 100 billion and of this, it is believed that perhaps 60-65 billion has been used to shore up the rupee.

The PMEAC member raised the almost deliberate neglect of education, health and nutrition by all governments and prime ministers from 1947 till today. He believes this is one of the important reasons why India’s economic development – not just GDP growth but of its people and workforce – has been held back or not as fast as it could have been.

Mohan also expressed great concern about India’s female labour participation and spoke about the need for large companies and manufacturing units to fuel exports. He said he felt let down by the private sector, which has not emphasised employment-led manufacturing but has instead focused on production that is increasingly reliant on high-tech machines.

As the World Bank Puts Aside Past Wisdom on Public Spending, Will Sri Lanka Pay Heed?

The COVID-19 crisis has forced the World Bank to recognise that private investors will not take the risk of keeping the economy running.

The COVID-19 pandemic is changing the way we think about the world. Even neoliberal global institutions must reckon with the changes. The World Bank’s South Asia Focus Report on the impact of COVID-19 on South Asian economies that was released a week ago marks a major shift in its policy prescriptions for countries in the region.

In the past, the World Bank pushed for trade and financial liberalisation, as well as the privatisation of public institutions, including public banks. Now, the pandemic and its resulting economic crisis have exposed the volatile rhythms and devastating consequences of the liberalised global market economy.

Political leaders around the world now talk about expansionary fiscal policies, basic income, and a general reorientation away from unlimited globalisation to a focus on domestic production and the importance of public institutions. The new approach has forced the World Bank to acknowledge this shift in its recent report on South Asia.

There are plenty of gaps, of course, in how the World Bank draws these lessons and thinks about them in relation to South Asia. The current crisis, however, is a clear moment that forces the World Bank to suggest solutions that take into account the emerging global debate. Unfortunately, however, the Sri Lankan government is struggling to keep up with these changes.

Moreover, mainstream economic experts the world over, who are supposed to hold political leadership accountable, have also been caught off guard. Therefore, progressives must hold the economic establishment accountable for its irresponsible policy prescriptions drawn from neoliberal global institutions, and its continuing lack of foresight in grasping challenges that grow bigger by the day.

Also read: Is India’s Scrutiny of Chinese FDI a Temporary Move or Part of a Sustained Future Strategy?

Recognising the problems

The most obvious sense in which the World Bank has been forced to shift is in its analysis of the financial sector. The report itself is sub-titled “The Cursed Blessing of Public Banks”. While the World Bank loathes to admit it, it must now recognise the benefits of fiscal stimulus delivered through public institutions. The World Bank puts in qualifications to justify its previous antipathy toward public banks. It claims that they still have administrative inefficiencies and can be more corrupt than private banks. In reality, however, public banks were forced to load up on toxic assets from private banks in order to bail them out.

The COVID-19 crisis has forced the World Bank to recognise that private investors will not take the risk of keeping the economy running. As the report puts it, “Sound public banks will have a role to play in the future, and especially in the near term. In the current economic situation, public banks are needed to provide countercyclical lending – as they did during the global financial crisis. And in some cases, they may be needed to inject capital into weak private banks.”

The World Bank further recognises that countries must operate “in a deteriorating global environment, while dealing with fiscal stress and problems in financial markets that were caused by pre-existing vulnerabilities.” Here, policies to expand the stock market in Sri Lanka with the Asian Development Bank’s Capital Market Development Programme (US$ 250 million) and the World Bank’s Financial Sector Modernisation Project (US$ 75 million) are a case in point. The loans taken for that project will have to be paid by the Sri Lankan government. As the recent World Bank report now shows, the Colombo Stock Exchange is down by 23% between Jan 29 and April 3. Along with portfolio outflows contributing to broader capital flight, this slump has hit Sri Lanka’s foreign exchange reserves hard.

File Photo: People maintain the one-metre distance between each other in Colombo, Sri Lanka, as they stand in a line to buy groceries during the break in the curfew imposed to tackle the new coronavirus in the country, March 24, 2020. Photo: Reuters/Dinuka Liyanawatte/File Photo

Despite growing recognition of the consequences of neoliberal policies, the World Bank report misrepresents fundamental issues that shape Sri Lanka’s response to the crisis. In particular, the World Bank cites Sri Lanka’s “fiscal stimulus,” such as the tax cuts after the presidential election. This supposed stimulus has not benefited communities lacking essential supplies after the onset of the COVID-19 crisis. Many countries have responded with significant fiscal stimulus packages after the crisis: the US (10% of GDP) and in South Asia, India (1%), and within the country, in the State of Kerala (2.5% of Kerala State’s GDP), Bangladesh (2.5% of GDP) and Pakistan (2% of GDP).

Also read: Why India Should Support an SDR Issue by the International Monetary Fund

The relief offered in Sri Lanka after the onset of the crisis is nowhere near the scale necessary to try and address the economic disaster. A back-of-the-envelope calculation shows that given Sri Lanka’s GDP in 2018 was Sri Lankan Rs 14,450 billion, the much talked about Rs 5,000 cash grant from the government, even if it is provided to 4 million households, is a mere 0.13% of GDP. Furthermore, Rs 5,000 is hardly enough to pay for a rural household’s essential provisions for a week. The Rs 50 billion stimulus in the form of debt relief to SMEs and others is just 0.35% of GDP. In this way, the Sri Lankan government has been all talk and little action in terms of real economic relief.

Holding the economic establishment accountable

The World Bank forecasts a GDP contraction of up to 3% (that is, – 3% growth) for Sri Lanka, and a corresponding increase of poverty to nearly 44% of the population. Sri Lanka’s local economic establishment remains far behind experts in neighbouring countries such as India, and even neoliberal global institutions such as the World Bank. This is evident in the fact that even until two weeks ago, most Sri Lankan economic experts were considering economic growth predictions of around 2%.

The World Bank Report forecasts economic contraction—meaning, negative growth—of between 0.5% and 3%. Sri Lanka’s mainstream economists will now follow the World Bank and revise their growth estimates down. This style of frivolous analysis by Sri Lankan economists, cosy with neoliberal global institutions, has systematically weakened the Sri Lankan economy and made the country incredibly vulnerable to the COVID-19 crisis. Has the underlying economic framework of these economists changed?

Moreover, even the World Bank’s latest estimates must be viewed in a critical light. The World Bank Report gives a relatively rosy prediction for GDP growth in India of 1.5% to 2.8% over the next year. However, two Indian economists, Kanitkar and Jayaraman, using their input-output model predict that depending on the length of lockdown, between 13 days and 67 days, the loss to GDP could be between 7% and 33%. Indeed, it is common sense that every day of curfew, which results in the loss of production of goods and services, will hit GDP growth. With its positive growth predictions, the Sri Lankan economic establishment appears to lack even basic common sense in understanding the dynamics of the crisis.

Also read: Unpacking RBI’s Bazooka 2.0: What it Means for the Economic Response Against COVID-19

It took a supply shock, a demand shock, and a financial shock for economic experts to start waking up to the negative effects of neoliberal policies such as trade liberalisation, financialisation and privatisation. Those around the world who have emphasised the need for food security and local production of essential goods appear vindicated. All this will be cold comfort, however, for the growing section of the population exposed to the most severe effects of the crisis if there are no major shifts in the political and economic priorities.

Devaka Gunawardena holds a Phd from the University of California, Los Angeles. Ahilan Kadirgamar is a Senior Lecturer, University of Jaffna.

World Bank Sees Just 5.8% Growth For India in FY’21

The institution also said that regional growth in South Asia is expected to pick up gradually, to 6% in 2022, on the assumption of a modest rebound in domestic demand.

Washington DC: The World Bank has projected a 5% growth rate for India in the 2019-2020 financial year, but said it was likely to recover to 5.8% in the following financial year.

The growth rate for Bangladesh has been projected to remain above 7% through the forecast horizon and, in Pakistan, it is projected to languish at 3% or less through 2020 as macroeconomic stabilisation efforts weigh on economic activity, the bank said in its latest edition of the Global Economic Prospects.

“In India, where weakness in credit from non-bank financial companies is expected to linger, growth is projected to slow to 5% in fiscal year 2019/20, which ends March 31, and recover to 5.8% the following fiscal year,” the World Bank said on Wednesday.

The global economic growth is forecast to edge up to 2.5% in 2020 as investment and trade gradually recover from last year’s significant weakness, but downward risks persist, it said.

The US’s growth is forecast to slow to 1.8% this year, reflecting the negative impact of earlier tariff increases and elevated uncertainty. The Euro area’s growth is projected to slip to a downwardly revised 1% in 2020 amid weak industrial activity, the bank said in the report.

“With the growth in emerging and developing economies likely to remain slow, policymakers should seize the opportunity to undertake structural reforms that boost broad-based growth, which is essential to poverty reduction,” World Bank Group vice president for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu, said.

Also Read: Budget 2020: India’s Youth Want Jobs, Not Another Speech

“Steps to improve the business climate, the rule of law, debt management, and productivity can help achieve sustained growth,” Pazarbasioglu said.

In the report’s India section, the World Bank said tighter credit conditions in the non-banking sector are contributing to a substantial weakening of the domestic demand in the country.

“In India, activity was constrained by insufficient credit availability, as well as by subdued private consumption,” the report stated.

The bank said the regional growth in South Asia is expected to pick up gradually, to 6% in 2022, on the assumption of a modest rebound in domestic demand.

“Growth in India is projected to decelerate to five per cent in FY 2019/20 amid enduring financial sector issues. Key risks to the outlook include a sharper-than-expected slowdown in major economies, a re-escalation of regional geopolitical tensions, and a setback in reforms to address impaired balance sheets in the financial and corporate sectors,” the report said.

In India, economic activity slowed substantially in 2019, with the deceleration most pronounced in the manufacturing and agriculture sectors, whereas government-related services sub-sectors received significant support from public spending, the bank said.

GDP growth decelerated to 5% and 4.5% in the April-June and July-September quarters of 2019, respectively, the lowest readings since 2013, it noted.

Sharp slowdowns in household consumption and investment onset, the rise in government spending. High-frequency data suggest that activity continued to be weak for the rest of 2019, the World Bank said.

The bank, in the report, praised India’s efforts to gradually eliminate subsidies on LPG. In India, starting in 2012, the government reformed its subsidy regime for liquified petroleum gas (LPG).

LPG subsidies to households encouraged the formation of black markets where subsidised LPG distributed to households was diverted to the commercial sector.

The government gradually increased the price of LPG for households while implementing a large-scale targeted cash transfer mechanism, the bank said.

“The programme successfully eliminated distortions in the LPG market, with limited adverse consequences for the poor, and the fiscal savings obtained from the reduction in subsidies fully offset the costs of the targeted cash transfer,” the report stated.

Budget 2020: Modi Govt May Cut Spending by up to Rs 2 Lakh Crore

With a revenue shortfall of about Rs 2.5 trillion, the government has little choice to keep its deficit within “acceptable limits”.

New Delhi: India’s government is likely to cut spending for the current fiscal year by as much as Rs 2 lakh crore as it faces one of the biggest tax shortfalls in recent years, three government sources said.

Asia’s third-largest economy, which is growing at its slowest pace in over six years because of lack of private investment, could be hurt further if the government cuts spending.

But with a revenue shortfall of about 2.5 trillion rupees, the government has little choice to keep its deficit within “acceptable limits”, the first official, who did not want to be named, told Reuters.

The government has spent about 65% of the total expenditure target of Rs 27.86 trillion till November but reduced the pace of spending in October and November, according to government data. A Rs 2 trillion reduction would be about a 7% cut in total spending planned for the year.

In October and November, government spending increased by Rs 1.6 trillion, nearly half the Rs 3.1 trillion it spent in September. The fiscal year starts April 1 and ends March 31.

Lack of demand and weak corporate earnings growth in the economy led to lagging tax collections this year. Analysts said growth will be hurt.

“When the private investment has slowed so much, this will definitely drag down growth further,” said Rupa Rege Nitusure, chief economist at L&T Financial.

India’s economic growth slowed for six consecutive quarters to 4.5% in July-September, despite a 135-basis-point cut in interest rates by the central bank since February 2019.

Also Read: Facing the Reality: How Can Modi Reverse the Current Economic Slowdown?

Now, even the Reserve Bank of India seems to have become more worried about inflation rising. It kept its key lending rate on hold on December 5, even though it slashed its growth forecast for the current fiscal to 5%, which would be the lowest in a decade.

Even a surprise corporate tax rate cut announced by finance minister Nirmala Sitharaman in September 2019 failed to spur private investment in the economy.

The government is likely to keep the fiscal deficit under 3.8% of gross domestic product, sources said, while letting it slip from its earlier set target of 3.3% for the year.

The government is likely to announce additional borrowing of 300 billion to 500 billion rupees for the current year to match the revised fiscal deficit, two sources in the government said.

(Reuters)

Growth Recession: Does India Need a Business Cycle Dating Committee?

Such a committee would not only strengthen the economy’s information base, it would bring greater clarity on the impact of employment during and after a growth recession.

A recent slowdown in GDP has triggered talk of whether the Indian economy faces a possible growth recession. The conventional definition of a recession, which economists use, is two or more quarters of declining real GDP. 

But have you wondered how a macroeconomist identifies the trough or peaks in a business cycle or obtains the period of recession or expansion in an economy? Most of them use a dating algorithm known as the Bry & Boschan method, named after Gerhard Bry and Charlotte Boschan who developed it in 1971. 

This algorithm follows certain rules – for instance, a peak is always followed by a trough and vice-versa. Other rules include that the duration of expansion or recession should be at least six months. Turning points within the six-month period of beginning or at the end of the sample time series data are eliminated and so on. This methodology was subsequently revised by Don Harding and Adrian Pagan in 2002 (known as Harding-Pagan algorithm). 

An illustration of the Harding-Pagan algorithm for the Indian IIP series (2004-05) (from April 2005 to January 2017) is shown below:

Figure 1: Dating of old IIP series (from April 2005 to January 2017) using Harding-Pagan Algorithm

Figure 1: Dating of old IIP series (from April 2005 to January 2017) using Harding-Pagan Algorithm

The background highlighted shows the recession phase observed using the old IIP series (2004-05) (a recession is shown as the duration from peak to trough) in the Indian economy. The diagram shows that the old IIP series (2004-05) was already undergoing a downturn beginning from October 2015 before demonetisation happened in November 2016.

Also read: India is Now in Classic Stagflation Territory

These algorithms help us understand in understanding the amplitude of business cycles in the expansion and recession phase. Apart from this, it also helps in understanding the asymmetricity in recessions and expansions (It helps in answering questions such as have a duration of recessions increased as compared to expansion or vice-versa). There are other alternative approaches available as well but the above approach is the most common approach which macroeconomist use. 

However lately, economists have raised concerns about using these algorithms for developing countries like India since they argue that business cycles in these countries behave differently than their developed counterparts. While it’s true that these algorithms were primarily designed for developed countries, the biggest drawback is that they are unable to differentiate between recessions. 

No two recessions are similar. For instance, what most macroeconomists and governments all over the world are concerned about is how well employment recovers from a recession. Consider the following case of the US. The graph shows the percentage change in total nonfarm employment since the start of each recession. 

Figure 2: percentage change in total nonfarm employment since the start of each recession.                               Source: Astrocyte Research, 2017

The diagram clearly shows that before the 1990s, job recovery was strong but after that, it’s been weak.  In the recessions in 1973-75 and 1981-82, total nonfarm employment started picking up strongly after 15-18 months. Economists are concerned that the US economy has of late experienced a jobless recovery—when economic activity experiences growth but the unemployment rate remains high. One reason might be that the changing nature of jobs after the 1990s along with factors such as organisational restructuring, labour market mismatch, industrial reallocation and so on. 

It is very difficult in the case of India to say how well employment has recovered recently when compared to the 1990s. Is India like the US also experiencing a jobless recovery? To answer such questions becomes challenging as there is no unanimity among different recession and expansion dates.

In India, we depend on individual studies for dating business cycles. Also, the government should make unemployment data available from time to time. 

Also read: Explained: The Slowdown in India’s Consumption Growth Story

One solution to this problem could be forming a Business Cycle Dating Committee (BCDC) on the lines of the National Bureau of Economic Research (NBER) & Centre for Economic Policy Research (CEPR) which does the job of dating the business cycles for the US & Euro Area respectively. 

The job of the BCDC could be to maintain the chronology of business cycles in India. The committee can identify various turning points which act as a reference point for the construction of coincident, leading and lagging indicators for the Indian economy. It can also maintain and subsequently revise the leading, lagging & coincident indicators from time to time as data for new indicators become available. It would help understand the changing nature of the Indian economy.

 The Reserve Bank of India (RBI) set up a working group of economic indicators in (2002) under R.B. Barman which proposed a standing committee for business cycle analysis. Its job would be similar to the business cycle dating committee.

Creating a BCDC will help in maintaining transparency and strengthening the information base for the Indian economy. Most importantly, it would bring greater clarity on the impact of employment during and after a growth recession in a far more enlightening way than what we currently have now. 

Mayank Gupta is a research scholar working in the area of Econometrics & Statistics at Mumbai School of Economics and Public Policy.

Indian Economy Set for Weakest Quarter of Growth in Five Years: Reuters Poll

The poll median showed the economy was expected to have grown at a year-on-year pace of 5.7% in the June quarter

Bengaluru: The Indian economy likely expanded at its slowest pace in more than five years in the April-June quarter, driven by weak investment growth and sluggish demand, according to economists polled by Reuters.

That would reinforce concerns seen in the minutes from the Central bank’s August meeting, which showed policymakers were worried about weak growth and indicated further rate cuts in the next few months to boost the slowing economy.

The poll median showed the economy was expected to have grown at a year-on-year pace of 5.7% in the June quarter, a touch slower than 5.8% in the preceding three months. But a large minority – about 40% of nearly 65 economists – expect an expansion of 5.6% or lower.

The GDP data is due to be released at 1200 GMT on Friday.

If the forecast is realised, it would be the weakest start in the first three months of a fiscal year in seven years.

“The deceleration in growth that commenced in the second quarter of the fiscal year ending March 2019 is likely to have continued,” said Rini Sen, India economist at ANZ.

“A host of high-frequency indicators – consumption and investment – have continued to weaken. The most prominent ones include auto sales, output of consumer durables, cement and steel production.”

Domestic passenger vehicle sales in July dived at the steepest pace in nearly two decades and declined for the ninth straight month in July, largely due to a liquidity crunch causing huge job cuts in the sector.

These measures, in addition to the risk of further escalation of the US and China trade war, are weighing on demand and business confidence in India.

Also Read: For India Inc’s Sob Story, Sitharaman Has a Sop Story. But Will It Help?

The median response to an extra question in the poll, which was taken August 21-26, showed the average growth rate for the current fiscal year 2019-2020 is likely to be 6.5% despite a weak start. But it is a downgrade from 6.8% predicted just last month and well below the RBI’s projection of 6.9%.

The RBI lowered its outlook for the fiscal year 2019-2020 at its August meeting. It has cut a total of 110 basis points in the repo rate since February, which includes an unconventional cut of 35 basis points earlier this month to 5.40%.

But with inflation not expected to rise anytime soon, the Central bank will likely ease its benchmark rate by 25 basis points again to 5.15% at its October meeting, followed by a 15 basis point cut in the first quarter of 2020, according to a separate Reuters poll.

Those cuts, in addition to a suite of recently announced fiscal measures, could provide some cushion for the economy in coming months.

On Friday, finance minister Nirmala Sitharaman announced reforms to revive economic growth, including rolling back recent tax hikes on foreign and domestic equity investors and several measures for industries.

“We believe that the measures announced by the finance minister will help to provide a fillip to credit growth, rate transmission and improving investor sentiment,” noted economists at Morgan Stanley.

“We continue to see a slow recovery in growth, as monetary measures will help but may not be sufficient to create a V-shaped recovery, especially in the context of slowing global growth.”