Even RBI Doesn't Seem To Know If The Economy Is Looking Up Or Down

Raman Swamy

You don’t have to be an economist to read the RBI’s Monetary Policy Statement. Unlike most official documents and reports, it is not full of technical economic jargon buried in a mountain of data and statistics. 

In fact, the best thing about the bi-monthly statement that was released two weeks back is the extra effort that the members of the Monetary Policy Committee seem to have made to use simple language (as far as possible) and to avoid long-winded sentences.  It is crisp, concise and to the point.

However, that does not mean that you can quickly browse through the text of the statement and get a clear answer to the question that everybody is asking: “Is the Indian economy recovering or is it still in the danger zone?”

To get an answer to that all-important question, you have to have some special skills - (a) the ability to read between the lines; and (b) the talent to put two and two together. 

Each of the six members of the RBI’s Monetary Policy Committee is obviously a brilliant economist – but, equally obviously, they do not necessarily have identical views on whether the financial economy is in good health or not. 

This is as it should be.  A high-level committee must have many minds with differing perspectives and different yardsticks for measuring performance. 

Hence the distinguished members - Urjit Patel, Viral Acharya, Michael Patra, Chetan Ghate, Pami Dua and Ravindra H. Dholakia - have come out with a consensus document that makes it difficult to jump to any judgments about whether things are looking up or down.  So cleverly have they interspersed and sequenced the good news and the bad news that it is left to the reader to arrive at his or her own conclusions.

Here are few of the takeaways (positive, negative and neutral all mixed together) about the state of the Indian economy. 

Overall Assessment: 
i)  Growth has fallen and the slowdown is widespread; but each sector is showing signs of life.
ii)  Private consumption, which contributes 68 per cent to GDP, has shrunk and been adversely affected by GST leading to loss of production and jobs in the labour-intensive unorganised sector.  But, hopefully, this could be a transient phenomenon.
iii)  Aggregate demand picked up in the second half, thanks to government expenditure.  But, without sustained support this could change.
iv)  However, net exports have dragged down aggregate demand due to surge in imports and slowdown in exports in third quarter due to GST-related working capital disruptions.
v)  Marked uptick in capital goods production during third quarter; modest revival of construction activity too.  
vi)  Fourth quarter outlook better; private consumption seems to be improving with growing domestic air passenger traffic, foreign tourist arrivals, rising sales of passenger vehicles and rise in the production of consumer durables.
vii)  The growth in sales of two-wheelers and tractors reflects buoyant rural consumption.
viii)  Capital goods production highest in 19 months.
ix)  Housing loans up significantly, which is a positive for residential investment.
x)  External demand remains a weak link. Merchandise import growth has slowed because of gold imports; simultaneously export growth has also weakened.

Supply Side Trends:
i)  Kharif foodgrains production estimates higher.
ii)  Total foodgrains production of rice, pulses and coarse cereals estimated to reach a record high.
iii)  Wheat production estimated to be lower -  decline in acreage and low soil moisture.
iv)  But wheat imports of 1.6 million tonnes will bolster buffer stocks and cushion potential adverse effects.
v)  Horticulture production at a new peak of 305.4 million tonnes - up by 1.6 per cent from last year.
vi)  For the year 2017-18 as a whole, value-addition in industrial sector down; but in terms of quarterly performance, second half was better than first.
vii)  Manufacturing on a rebound.  Consistent rise for eight quarters; but marginal fall in last three months.

This is just a sample of the Monetary Policy Statement. Easy to read and understand even for those without a Ph. D in Economics. 

But the billion-dollar question remains unanswered -  Has India recovered from the shock of demonetization, GST, forced digitalization, bank frauds, investment slump, agrarian distress and yawning fiscal deficit? Yes or No?  Please do not ask – even the RBI pundits do know.

Apr 17, 2018