Those cheering Arvind Subramanian him displayed naivete and mediocrity
New Delhi: With GDP for the fourth quarter of 2018-19 coming in at 5.8 per cent and maverick statements by the ex-CEO, Arvind Subramanian, that the 7 per cent plus GDP growth in the 1st term of Narendra Modi may have simply been an overestimation based on data jugglery, Modi naysayers who were resoundingly trounced in the 2019 general elections, found fresh ammunition and needless to add, large sections of a compliant media that does not even know GDP from GNP,has been quick to question the "fastest growing global economy" tag that has been one of the high points of the Indian economy, under the Modi government, from 2014-2019.
The change in base year from 2004-05 to 2011-12, for instance, takes into account additional and important changes in various sectors, particularly the changes related to manufacturing. Forexample,the new updated back series in November 2018 relies on the far more comprehensive, Ministry of Corporate Affairs (MCA-21) data-bank, versus the earlier data that was taken from Annual Survey of Industries (ASI). Also, between 2004-05 and 2011-12, financial services' data have undergone a drastic change because the banking sector has seen a growth explosion with an array of banking products which is reflected in the solid credit offtake numbers in retail loans, housing loans, personal loans and vehicle loans, making the shift to a new base year, logical.
Also, one such reinterpretation of data is for the telecom space. Here, the latest GDP series by the Modi government has taken into consideration the usage or minutes of use of telecom services, in place of the number of subscribers that was used earlier. For telecom, earlier, the number of subscribers was considered. Now, it has changed to number of minutes used. In effect, earlier, voice traffic or phone calls by the telecom subscriber base was a key reference point, but now, as everyone would agree, the growth in data usage and data traffic has been humungous, so it is only fair that this change in composition from voice to data and the very manner in which the telecom space has evolved, is rightfully captured. And that is precisely what the reconstruction of GDP with 2011-12 as the base year, has sought to achieve.
Unlike several times in the past, when the base-year had been changed, with no protests or even a meek squeak from relevant stake-holders in 1970-71, 1980-81, 1993-94, 1998-1999 and 2004-05, the new base year adoption of 2011-12 by the Modi government, was met with misguided protests from several sections of the intelligentsia and a rudderless opposition, clutching at straws. The protests are however meaningless, as the new series has undergone changes which are aligned with the IMF and the UN system of accounts, in line with global best practices. In most developed countries including the USA, the base year is in fact, changed virtually every single year and they follow what is called a "rolling base year". Hence if the Modi government rightfully changed the base year for GDP estimation from 2004-05, to 2011-12, why the brouhaha? It was in any case long overdue and is a welcome move!!
What Modi's critics conveniently forget is that the 5.8 per cent in the March 2019 quarter has come, despite rising global protectionism, that in the last 6-9 months, has taken a turn for the worse, falling global trade amidst rising geopolitical tensions over a turbulent Brexit, Venezuelan bankruptcy, increasing tensions between the US and Mexico, US and Iran and ofcourse, no signs of trade wars between the US and China thawing anytime soon, with Trump blacklisting Huawei and slapping 25 per cent tariffs on $200 bn worth of Chinese goods and services.
With US & UK reaching a tacit agreement to prevent Huawei from developing its 5G network, UK close to stagnation with many growth parameters at their lowest levels since 2012,manufacturing declining at a rapid pace in Germany, that has now reduced its full year GDP forecast to just 0.5 per cent from the earlier 1 per cent, stricter sanctions by US on Iran, escalating tensions in the Middle East and, China & Russia taking on the United Nations over the Sudanese issue,geopolitical mayhem globally, will ensure growth is tepid in 2019 and 2020.
Against this tumultous backdrop,the World Bank sticking to 7.5 per cent GDP forecast for FY 2020 for India, with the RBI albeit a tad more conservative at 7, versus the earlier 7.2 per cent, bodes well. Also, after a 25bps reduction in Repurchase Rate (REPO), to 5.75 per cent by the RBI in its credit policy on 6th June 2019, in all, there has been a 75 bps reduction in the REPO rate between February and June 2019 and, sooner than later, banks will be nudged into meaningful monetary transmission, if they dont do it voluntarily. From calibrated tightening to neutral and now to an accomodative stance showcases that both the government and the RBI are in sync and determined to address liquidity related issues that some NBFCs are grappling with. System liquidity in early June at a surplus of Rs 66000 crore, Rupee closing at 69.27 to the Dollar and a 10 year 2029 government bond yield closing at 6.93 per cent on 6th June 2019, the lowest since November 2017, indicate that money markets and currency markets are in fine fettle and, Open Market Operations (OMOs), by the RBI to inject liquidity with a Rs 15000 crore OMO auction on 13th June 2019 itself bears that out in no uncertain terms.
Speaking of NBFCs, say a DHFL for instance, the downgrade by credit rating agencies and subsequent rout in its stock price is part of a cleansing exercise that should be welcomed. The fact that DHFL recently cleared dues worth Rs 962 crore, is again welcome news. Many NBFCs had massive Asset Liability Mismatch (ALM), issues which they ignored despite repeated warnings by regulators and a correction in stock prices long overdue, should now chastise them to stop "borrowing short and lending long". To confuse therefore,the IL&FS or DHFL issues as "contagion", is foolhardy. In the case of DHFL for instance, it is still very much a robust, cash flow generating, solvent company that was temporarily caught in a storm due to its inability to service short term debt obligations. Liquidity stress in some pockets however cannot and should not be confused with a generic systemic crisis. The inter-bank money market continues to remain inherently strong, with the referral bank rate that acts as a crucial signalling point, at a mere 6 per cent and the REPO rate at its lowest level since July 2010.
Again,the extra leeway that the Modi government gets from falling crude prices internationally cannot be ignored. With US 10 year bond yield slated to eventually touch 1.75 per cent in the medium term and global growth in the next one year slated to likely fall below the already downwardly revised IMF projected 3 per cent, India would stand tall even if it manages 7 per cent in 2019-20,as per revised RBI estimates. To mistake a cyclical slowdown as a structural one, abetted by global,rather than local factors, is like missing the woods for the trees. Modinomics,in the last five years, has in fact, laid solid foundations for a 10 per cent growth trajectory going forward and, the structural reforms initiated between 2014-2019, will eventually start bearing fruit, in more ways than one, under "Modi 2.0". The best example of this is the fact that, for the third month in a row in May 2019, GST collections exceeded Rs 1 lakh crore.
If crude settles at $60/barrel or lower,that could well be the "alpha factor", for the next phase of growth, moreso given the global oil glut, with US crude inventory stockpiles rising to over 483 million barrels recently. Also, with $455 billion slated to be wiped out from global GDP as per IMF, thanks to trade wars, oil importing economies like India with a captive middle class of roughly 400 million, of which a large part are millennials, should outperform, driven by both domestic consumption and investment spending, which are structurally in a sweet spot, despite the cyclical peaks and troughs.
Those fear-mongering about the slowing auto sales do not realize that BS-VI emission norms that have to be complied with by 2020 and new "Axle Load" norms in the case of Commercial Vehicles (CVs), apart from higher third party insurance costs, are some of the reasons why auto sales have taken a pause recently. These factors are specific in nature and with auto makers and end users now adjusting to them, a robust revival in auto sales is on the cards. Bajaj Auto and Hero Motorcorp for instance, sold over 4 lakh and 6 lakh units respectively, in May 2019 Bajaj's domestic sales growth at 29 per cent in fiscal year 2018-19, Ambuja's 58 per cent standalone profit growth in the March quarter of 2018-19, Shree Cement's EBITDA growth in excess of 20 per cent in the same quarter, FMCG behemoth, HUL's domestic consumer business growing at 9 per cent, with EBITDA and profit growing at 13-14 per cent in the March quarter, ITC recording sales and profit growth of 13 and 19 per cent respectively in the final quarter of 2018-19 and ofcourse, HDFC Ltd's standalone profit growth of 27 per cent in the fourth quarter of 2018-19, driven by net interest income growth of 20 per cent and, individual loan book growing in excess of 15 per cent, are all resoundingly vindicative of one simple fact--- any economy that is facing a structural slowdown will never ever see its key corporates in the cement, two-wheelers, home loans and consumer goods' space growing in healthy double digits.
The fact that some of India's biggest and best known corporates are growing in high teens and more, therefore, debunks any premise of a structural slowdown. Yes, some sections of the economy are facing a cyclical soft-patch but that is a natural outcome of a high base effect and global headwinds. Falling bond yields and a stable Rupee with relatively superior GDP growth, versus global peers, will ensure that India attracts sticky and long term Foreign Portfolio Investment FPI and FDI flows, which will more than compensate for any consumption or investment led slowdown in few select, cyclically sensitive pockets of the economy. For instance, in the first week of June 2019 itself, net FPI flows into India stood at Rs 7095 crore, after clocking Rs 9031 crore in May, Rs 16093 crore in April,Rs 45981 crore in March and Rs 11182 crore,in February 2019, in a ringing vindication of Prime Minister Narendra Modi's reformist approach.
Also,let us not underestimate the far reaching multiplier effects of schemes like "PMKISAN", where over Rs 86000 crore to roughly 14.5 crore farmers, will, overtime,based on the famous "Income Multiplier Effect",boost aggregate rural incomes, demand and economic output. Even a textbook economist knows that thanks to the "income multiplier", even a small injection by the government to increase disposable incomes,has the ability to disproportionately increase output and overall demand, within the domestic economy.
As if on cue, a recent report in January 2019, released by Standard Chartered Bank, says that based on Purchasing Power Parity (PPP), by 2030, at $46.3 trillion, India is likely to become larger than the USA in terms of GDP, and just behind China, with roughly 77 per cent of the Indian population being 44 years of age or lower, with India’s overall consumption alone being a whopping $5.7 trillion annually. Clearly, Modinomics has laid the foundations for India’s entry into the super league of nations, in terms of economic dominance, in the years ahead. A certain Arvind Subramanian used outdated GDP proxies to underestimate India's bona-fide GDP growth of 7 per cent plus in the last 5 years, by conveniently ignoring sectors like agriculture and services, either out of mala fide ignorance or, worse. Those cheering him displayed naivete and mediocrity. An economy that added over 70 lakh crore to GDP from 2014 to 2019, could have never ever grown at anything less than over 7 per cent and, that is not up for debate!!
(Sanju Verma is the chief spokesperson and co-convener of the intellectual cell of BJP Mumbai. The views expressed are personal)
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