Growth in agriculture has registered a slowdown at 1.7 per cent, which means there will be problems in the rural areas.
The rise in the GDP growth in the second quarter of 2017-18 to 6.3 per cent from the previous 5.3 per cent is something to celebrate because it shows that the GDP growth rate has not slid further. The obsession with the GDP growth rate remains with all governments. The NDA government is no exception. But a small increase does not show that all is well with the economy. There are still deep rooted structural problems which need to be addressed in order to increase the welfare of the people through the rise in GDP growth. While manufacturing growth has increased to 7 per cent which augurs well for export growth (which incidentally declined in October 2017 by 1.12 per cent), the agricultural growth has registered a slowdown at 1.7 per cent which means there will be problems in the rural areas. The slowdown in agricultural growth has been attributed to poor monsoons, but the real cause is much deeper and needs to be addressed.
In a recent interview, Union Finance Minister Arun Jaitley said that in the next budget, which will be the last one before the general elections, the focus will be on infrastructure and the rural economy. It will be tough going for the rural economy with low agricultural growth in terms of mitigating farmers’ debts which will also affect the consumer demand for manufactures in the next quarter. Clearly, the loan waivers have not been a panacea for the rural sector and issues like crop insurance, minimum support prices giving adequate returns to farmers, irrigation, storage and high transportation costs have to be dealt with.
Another reason for worry is that new investments are not picking up and gross capital formation has dropped from 27 to 26.4 per cent of the GDP. This brings us to more important questions: Why is it that industry is not borrowing from banks when banks are full of liquidity? It is a problem that has two sides — banks are reluctant to lend due to their own balance sheet problems and even with the recent recapitalisation of banks by the government, the balance sheets are not absolutely clean yet. The investors on the other hand are not willing to borrow at the current high rate of interest when the returns to investment are not promising. External demand is still weak though there is a positive growth in global trade and investment. Indians themselves are recovering from the twin shocks of demonetisation and the GST which created a disruption in the small and medium industrial sector. The rise in manufacturing growth does not reflect the disruption as it takes into account big factories’ outputs.
In the past few years, the economy has been driven by consumer demand which has lost its momentum and public sector spending is also much less than before. Consumer demand has been affected by a number of factors which range from growing insecurity regarding the future income flows to rise in health and education expenditure. Due to slackness of demand, capacity utilisation of manufacturing units has not been enough to trigger new investment in capital goods. Capacity utilisation levels has been declining over the last few years specially in key manufacturing sectors such as power, automobiles and cement. It is preventing industrialists from undertaking fresh investments especially when their borrowings are already high and companies are overleveraged. Fresh investments have however risen a little by 4.7 per cent which is higher than the dismal 1.6 per cent of the first quarter.
As a result, very few jobs have been created in 2017. According to one source, net increases in employment in around 241 companies of the BSE 500 index was only 80,000 people in 2017. In 2016, 108,000 jobs had been created. Contrast it with the number of job seekers in India today which is around one million a month. The main issue facing the government today is job creation and skills formation. Also, there may be many jobs available but the applicants turn out to be unemployable. Skills development has to be speeded up both by the private and government initiatives.
Oil prices have also started to rise, which will increase costs and reduce margins for industry. Earlier during the last three to four years, fall in oil prices offered a bonanza for industry and provided an unusual push to manufacturing growth.
The government is very keen on undertaking reforms that would increase India’s rank higher in the ‘Ease of Doing Business’ index and increase the share of manufacturing in GDP to create jobs. It has promoted digitalisation, reforms in the power discoms through the UDAY initiative and is earnest about cutting bureaucratic red tape. It has also managed to reduce corruption. The Modi government did inherit an economy with many problems and public sector banks’ NPAs is definitely one of them.
A mountain of NPAs (more than ₹8 lakh crores) has created many problems, one of which is the much lower credit offtake. Credit growth has remained low at 7.7 per cent. During November 2016-March 2017, credit growth fell to a historical low of 4 per cent. On the whole, credit offtake will depend on how fast industrial growth recovers accompanied by better capacity utilisation and how quickly the public sector banks recover.
The demand for credit will also rise if interest rates are lower. But the RBI is not likely to cut the interest rates in the near future because at the end of 2017, 96.1 per cent of the fiscal deficit has already been met. The government’s additional borrowings are therefore inevitable and likely to be inflationary. Also the impact of the salary hikes due to the implementation of the 7th Pay Commission awards can be inflationary. The RBI may thus remain hawkish.
The service sector could offer a ray of hope for job seekers but it grew only at 6.6 per cent in Q2, slower than the 8 per cent growth in Q1. But areas like trade, hotels, transport and financial services, growth rates are up. Tourism, personal services, healthcare are areas in which people with low skills can be employed. Infrastructure building will also employ many skilled and unskilled people. But construction industry grew at only 2.6 per cent in Q2. Next quarter could be better but we have to wait and watch.
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David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany
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