The Economy Under Free fall: What The New GDP Numbers Mean

As the saying goes, “as you sow, so shall you reap”. Nearly, three years of economic mismanagement has finally begun to show up even in the fudged up GDP figures of the Modi government. Growth has fallen to a measly 6.1% over the Jan-March period.

Three years back, the government devised a “new method” of calculating GDP which lifted the projected growth rate from 4.7% to a respectable 6.9% for the year 2013-14. Over the past years, many renowned economists & agencies had questioned the “new methodology” as a blatant overestimation when the economic indicators render a very different ground reality. The growth is primarily driven by government & consumer spending. Capital spending is declining & the manufacturing sector is sluggish with little relief in the horizon.

Keeping the cacophony of newsroom aside, let’s delve deeper into what’s wrong with the Indian economy:

Ours is a cash dependent economy. Nearly, 68% of the transactions in India are cash based. This means if you deliberately pull out most of cash (500 & 1000 rupees note together stood for nearly 80% of the cash value in circulation) the purchasing power of people is severely reduced. Whether demonetisation helped the government unearth the tons of black money, stifle the terror-funding & paralyse counterfeit currency in circulation is debatable but, there’s no doubt that the much celebrated demonetisation & then, the remonetisation scheme broke the back of a common Indian consumer. The decrease in purchasing power had a domino-effect, manufacturing suffered with reduced demands taking away jobs. Unemployment rate is steadily rising; doesn’t serve a government that promised crores of jobs under the “Make In India” banner. The crux of the story is; demonetisation was a colossal failure & in Jean Dreze’s words “it was like shooting at the tyres of a racing car”.

Another important factor leading to a slump in the Indian economy is the phenomenon of “jobless growth” where the economy apparently grows but, there’re no new jobs in the market. In some ways jobless growth is actually deceptive; it helps the government in its PR exercise. They can continue gloating over the numbers even as nothing really trickles down to the masses.

From the

During the three years from 2009 to 2011, when India’s GDP was still growing at an average 8.5%, the organised sector was producing on average 9.5 lakh new jobs every year. Bear in mind, even this was seen relatively as ‘jobless growth’. In the last two years, 2015 and 2016, the average employment generation has plummeted to less than 2 lakh jobs a year. This is less than 25% of the annual employment generated before 2011. In 2015, when fresh employment generated in these 8 sectors (textile, metal, gems, leather, IT, transport, automobile & handlooms) collapsed to an all time low of 1.5 lakh jobs, the government was so alarmed by the development that it decided to review the methodology for data gathering. It expanded the scope of the organised industry from just eight manufacturing sectors to include some key services industries such as education, health and restaurants. This was clearly done to bump up the employment growth figures because the manufacturing sector was showing a very poor growth trend – around 1.5% annually – whereas the service sector was doing much better and growing at 7-8%.

The curse of jobless growth

Over the years Indian economy has seen a robust growth but, jobs weren’t generated at a similar pace. The growth is primarily driven by the service sector where traditionally fewer people are required hence, fewer jobs. Increasing unemployment rate only further stresses the economy. Remember, we’re conditioned to believe that India would be at an advantageous position owing to its young demographic “joining the workforce” but, then we’re standing at the stark reality where a significant portion of our young people won’t find jobs. What happens then? An aspirational young demographic that is agitated would be an end game scenario for the ruling party in the next general elections. Maybe the ruling dispensation only understands the language of electoral arithmetic; they must know that alienating the youth severely damages their 2019 prospects.

And then, for all its pomp & show, “Make In India” is little more than a branding exercise. The manufacturing sector which is at the heart of “Make In India” is turning out to be a laggard. Unless robust growth is seen in the manufacturing sector jobs would never come. Attracting investments in service sector creates only few high skilled jobs. This only perpetuates the cycle of jobless growth. The World Bank’s “Ease of doing business index” continues to place India at an unenviable 130th position out 190. In other words, it’s just too tough to start a business in India & foreign investors are averse of the bureaucratic red-tape which is more of an inhibitor when it’s supposed to be a facilitator. For all its theatrics, Modi government is clueless & doesn’t know how to manage an economy as diverse as India. They’ll do well if they’d only divest the overburdened Finance-cum-defense minister of some responsibility.

The receding growth is a direct result of all these factors. The ruling party may be on a winning spree by harping on emotive issues but, unless they get their act together, we better be prepared for the worst.

(This post also appeared on HuffPost India)


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