Economy Isn't Fastest-Growing, It's Crawling

Mala Jay

On the day of the very first Cabinet meeting of the Modi 2.0 government, the Reserve Bank came out with some incriminating evidence—that the Indian economy has been crippled by monumental mismanagement in the previous five years.

The Prime Minister and his ailing former Finance Minister had been in denial mode from much before the election campaign. Demonetization did not destroy the economy, they claimed. India is the fastest growing economy in the world, they boasted. There is no epidemic of unemployment, investment slump, production loss or agrarian distress, they insisted. They went out of their way to suppress or delay releasing authentic data that might have proved or disproved their claims.

Now, after the elections have been won and lost, the reserve bank has come out with the sobering news that GDP growth in the quarter ended March 31 (January-February-March) was much worse than had been feared.
The release of figures for the fourth quarter of 2018-19, which had been delayed because of the elections, was officially announced on Friday. It showed that India's GDP grew by only 5.8 percent in the January-March period, far less than the 6.5 percent that even the most pessimistic economists had forecast.

This confirms what former Finance Minister Arun Jaitley has been denying for long—that the economy been slowing down to alarmingly low levels.

India can no longer boast of being the world's fastest-growing economy. That status has been regained by China with a growth rate of 6.4 percent in the January-March quarter.

The RBI announcement also confirms that the Indian economy's performance during the whole of Financial Year 2018-19 was lower than what the Modi government was willing to admit during the election campaign. Now that the last quarter numbers have been officially released, the growth rate for the whole of the last year works out to 6.8 percent—not 7.2 percent as claimed.

Just weeks ago, at the height of the election campaign, the RBI had conducted it Monetary Policy Review and issued a statement that "despite some sectors facing certain stresses the overall GDP growth would be above 7.2 percent".

That RBI claim was in April—less than one and a half months ago. It has proved to be a misleading projection. It has now been officially admitted that GDP growth was 6.8 percent in 2019-20.

Investors and corporate are disappointed and even annoyed. As the Central Bank of the country, the Reserve Bank is not expected to give incorrect financial data.

Questions are being asked as to how the RBI monetary review in April could have been off-target by such a huge margin. Was it a calculation error or a deliberate attempt to fudge reality? In either case, it has grave implications and would dent the credibility of the Reserve Bank both internationally and domestically.

It is not as if independent analysts were unaware of the slowdown in the Indian economy. For instance, a study by Reuter's news agency had earlier pegged India's GDP growth at 6.3 percent on a quarter-to-quarter basis.

Moreover, the government's own Ministry of Statistics had revised its growth projections downwards from 7 percent to 6.8 percent for the fiscal year 2018-19. In the heat of the election fever few took note of that but it now tallies with what RBI has stated on Friday.

However, even 6.8 percent is being viewed as a possible overestimate by economic experts who have been expressing concerning about the Modi government's habitual reluctance to be transparent about official data on a range of areas, including unemployment statistics.

Meanwhile, now that the fears of a slowdown have been finally confirmed, the logical response should be for the RBI to announce another rate cut in its June policy review. A token reduction in repo rate by 25 basis points may not be enough to provide a stimulus to the sluggish economy. Investors and corporate are therefore keeping their fingers crossed for a substantial 50 basis points rate cut—or even more considering the gravity of the ground situation.

However, such high expectations are unrealistic. Neither the Central Bank nor new Finance Minister Nirmala Sitharaman would relish the prospect of a spurt in inflation—which is likely if banks cut their lending rates and make corporate borrowings easier.

The problem is that the RBI did cut policy rates by 50 basis points earlier this year, but it does not seem to have boosted the confidence of business and industry.

During its review meeting next Tuesday, Wednesday and Thursday, the Central Bank will almost certainly reduce the repo rate by a further 25 basis points. But will it be enough to repair the damage done by note-bandi, GST and other shocking economic policies in the Jaitley-Modi nightmare era? What newer and nastier surprises are in store under the newly-born Nirmala-Modi dispensation?

Vol. 51, No. 52, Jun 30 - Jul 6, 2019