Vijay Kumar Gaba

Shri Ram Janmabhoomi Teerth Kshetra (SRJBTKshetra), a public trust, is building a grand temple dedicated to Lord Rama at his birthplace in Ayodhya of Uttar Pradesh. Recently, the consecration ceremony of Lord Rama’s idol at the temple was performed with great fervor. To facilitate the devotees visiting the temple, the Government of Uttar Pradesh and the Central Government are investing in developing civil infrastructure in and around the Ayodhya town. Reportedly, the Master Plan 2031 envisages the redevelopment of Ayodhya to be completed over 10 years with an investment of over Rs 85,000 crore.

This is expected to establish Ayodhya town prominently on the world tourist map. It is pertinent to note that just three years ago, Ayodhya was a small municipal town with a population of approximately 70000 with poor civil infrastructure. Impressed by the government’s investment in Ayodhya’s civil infrastructure, Global brokerage firm Jefferies commented in a report, “The grand opening of the Ram temple at Ayodhya by PM Modi on Jan 22nd, is a big religious event. It also comes with a large economic impact as India gets a new tourist spot which could attract over 50 million tourists per year. An Rs 85,000-crore makeover (new airport, revamped railway station, township, improved road connectivity, etc.) will likely drive a multiplier effect with new hotels & other economic activities. It can also set a template for infra-driven growth for tourism”.

Incidentally, it is not Ayodhya alone. This is, apparently, the template of development chosen by the government. In the past few years, the government’s emphasis has been on the development of infrastructure, especially logistic infrastructure, and encouraging private enterprises to build manufacturing capacities taking advantage of improved infrastructure and logistic facilities.

It is pertinent to note that the contribution of manufacturing to India’s economy peaked in the mid-1990s and has been on the decline since then. In the year 2022, manufacturing contributed 13.3% to India’s GDP, the lowest level since 1967.

Earlier some East Asian countries, and lately China, used this strategy to accelerate their economic growth with mixed outcomes. Though years of high growth ensured a decent quality of life for their citizens, none has been able to become a developed economy. The high growth phase could not be sustained even for two decades. The economies are now mostly growing below par. In recent years, Chinese economic growth has also been decelerating. The authorities have clearly shown a tendency to shift focus on domestic consumption to support the economy.

The Indian economy has mostly been dominated by services on the supply side and consumption on the demand side. Now there is a concerted effort to change the model to manufacturing and investment-led growth.

The questions that need to be examined in this context are:

·         Given the fact that the Indian economy may probably be in its last decade of demographic dividend, is it desirable to cut spending on building social infrastructure, reduce the education and healthcare budget, and invest in long gestation infra projects?

·         Agricultural sector contribution to India’s GDP has been stagnating around 16-17% for a long time. The proportion of the population directly dependent on this sector is close to 44%. Would it not be better to invest in developing agro-technology, infrastructure, and logistics than focusing on manufacturing (with much lower employment intensity now) to make growth sustainable, faster, and equitable?

·         What is the probability that in one decade India can meaningfully increase its share in global manufactured trade? Curtailing domestic consumption to augment exports may be a high-risk strategy at this point in India’s economic growth journey. Of course, if it is successful, the rewards may be exciting. But the odds do not look great at this point.

·         Self-reliance in defense production, full energy security, and net exporter status in manufactured electronics, are three key expected outcomes of the current policy direction. Healthcare, higher education, advanced technology, water, urban planning, etc. are some of the areas that are getting lower priority than required. Failure to achieve the outcomes could prove to be exponentially disastrous.

The point is that this midway diversion in the growth strategy could be fraught with significant risk. Our social, political, cultural, and economic structures are not the same as China’s. Adopting the Chinese strategy of economic growth and development may neither be desirable nor effective, in my view.

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View from my standpoint

 The macro economic data released last week produced further evidence of the Indian economy struggling with stagflationary conditions; notwithstanding the denial by various authorities.

Inflation impact widening and deepening

The consumer price inflation date for the month of April 2022 was a negative surprise. The consumer prices escalated at a rate of 7.8% (yoy) during the month. The higher inflation was, to a large extent, a consequence of imported inflation which added almost 2% to the headline inflation number. Though, the inflation due to rise in domestic prices at 6.4% was also no comfort.

With worsening current account (and depreciating INR); continuing supply chain disruptions; protracting Russia-Ukraine conflict; extreme weather conditions and tight fiscal conditions (little chance of duty cuts) and rising cost of capital – it is unlikely that we shall see any material easing in prices in the next few months; even though the headline inflation number begins to ease from October 2022 due to statistical reasons, as the high base kick in.

Contracting consumer demand constricting the growth

On the other hand, the recent data about the growth in Industrial Production raised many red flags. The IIP growth for 4QFY22 has come at a dismal 1.6% (vs 2.1% in 3QFY22).

The consumer goods production (both durable and non-durable) contracted 4.3% in March 2022, recording its sixth consecutive decline. This clearly shows the stress in the consumer demand. Growth in capital goods was a poor 0.7%. Manufacturing growth in March was also poor at 0.9% yoy. 

Normalizing for the sharp dip in 2020 due to the pandemic induced lockdown and subsequent sharp spike in 2021, India’s Industrial Production has been dismal in the past decade.

Poor suffering the most

Notwithstanding the claims of some politicians, the poor seem to be hurt most by the rising inflation and slower growth. As per the latest NSO data, the inflation rate is much higher in most populous states like West Bengal (9.1%), Madhya Pradesh (9.1%), Maharashtra (8.8%), Uttar Pradesh (8.5%0, Odisha (8.1%0 and Rajasthan (8.1%). These states may be home to a large proportion of the poor population in the country.

Kerala (5.1%) and Tamil Nadu (5.4%) are suffering relatively much lower inflation.

Besides, the real interest rates have fallen deep into negative territory in the past couple of years, as monetary stimulus to mitigate the pandemic effects has brought the rates lower while inflation has stayed high. Obviously the poor savers and pensioners who rely on meager interest income for survival are suffering a great deal.

 The recent macroeconomic data indicates that Indian economic activity may soon reach to its pre Covid level. The latest reading on Nomura India Business resumption Index is 93.4, just 6.6% below pre Covid induced lockdown level. The media headlines and official commentary claims it to be a “V” shaped recovery, implying that one year may have been lost, but Indian economy is nearly back to “normal”. There is section of experts which is terming it to be a “K” shaped recovery rather than a “V” shaped one; implying that one part of the economy has raced much ahead while the other continues to slide.

Some noteworthy data includes:

IIP growth is now back to February 2020 level. In December, e-way bill collections rose by 15.9% to 6.42 crore in December 2020, the highest since April 2018. The mobility to work places ticked up in past 8 weeks, as shown by Google mobility index.

Elsewhere, China has reported positive growth of 2.3% (yoy) for 2020 as a whole. UK, USA and many other European countries have seen fresh surge in cases of infection and have re-imposed some mobility restrictions, hampering the process of economic recovery. In past couple of weeks the US job data has been disappointing.

These data certainly a matter of relief. However, in no way it makes me comfortable. I know from my travels and interaction with people that for a significantly large section of population, the normalization will take years, if not decades, of “high” economic growth. Besides, the amount of stimulus that has taken to bring the economy back to “pre Covid” level may not be available to take it back to pre global financial crisis (GFC) level; exatly we want to be.

For now, Indian economy is like a middle aged person suffering from chronic asthma and diabetes, who has just returned home after a successful open heart surgery.

 As per the latest survey conducted by RBI, the Consumer Confidence in India remained at an all-time low level in September with the general economic situation worsening during the month. This data read with the dismal IIP growth (-8%) and elevated consumer inflation (7.34% highest since January 2020) indicates that (i) the recovery from lockdown is slower and belies the enthusiasm shown by some of the analysts and economists; and (ii) we shall struggle to reach the pre lockdown level of economic activity for at least 2 more quarters and any improvement in the growth trajectory normalized for lockdown impact may still be far away. Remember, the economic growth in India was declining much before the pandemic forced a complete lockdown in March 2020.

The key highlights of the Consumer Confidence Survey (September 2020) are as follows:

·         As per the survey, the consumer confidence (current situation) continued to slip for third successive month and is presently at all time low. Presently, the respondents perceive further worsening in general economic situation and employment scenario during the last one year. Though some improvement is expected a year later.

·         21% respondents reported curtailment in overall spending during the past one year, when compared with the last survey round. While 59.8% reported cut in non-essential spending.

·         Even though consumers expect improvements in general economic situation, employment conditions and income scenario during the coming year; the discretionary spending is however expected to remain low in the near future.

·         Households’ median inflation expectations remained elevated for both three months and one year ahead periods.

83% households reported rise in cost of living. 75.9% expect cost of living to rise further in next 12 months.

An astounding 81.7% household reported worsening of employment expectations in past one year. Though, 54.1% respondents hope that the employment conditions will improve in next one year. A significant 36.1% of respondents believe the employment conditions will worsen in next 12 months.

·         62.7% household indicated lower income in past one year; while only 8.9% reported higher income. 53.2% household expect income to rise in next one year, while 10% expect it to decrease further. Overall, 79.6% respondents felt that general economic conditions have worsened in past one year; while 34.8% respondents continue to believe that the conditions will worsen further in next 12 months. Only about 50% respondents believe the conditions to improve in next 12 months