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Op-Ed

VIDEO: 7% GDP suggests economy not recovering with domestic investments

ET Now

Subir Gokarn pushes for government reforms in infrastructure and ease of doing business

This interview first appeared on ET Now on 31 August 2015. Watch the full video here.

The numbers are out – first quarter fiscal gross domestic product (GDP) at 7% and gross value added (GVA) at 7.1%. Do these numbers bring cheer or do they bring a certain amount of frustration at the pace of recovery, which is rather slow, or do they actually puzzle you because the GVA continues to be higher than the GDP and does this raise questions on the methodology that we’re following?
I don’t think the methodology should be an issue in this debate because we don’t yet have clarity on the new numbers versus the old numbers, in terms of a long enough sequence to compare. But yes, the numbers are a little disappointing for those of us who were expecting the recovery to be consolidating, if not gaining much momentum. I would have expected the numbers to be slightly higher than 7.5%.

The main rationale for that comes from the fact that lower commodity prices (remember, the onion problem is a matter of this quarter, not so much of the previous quarter), lower energy prices, stable food prices, all of these would help discretionary consumption and even if this didn’t translate directly into manufactured goods showing an increase in output, then at least services. But this suggests that there has been some deceleration—not very dramatic—across the board, both in manufacturing and in services. That would suggest than that there is some level of resistance to the economy breaking out of the narrow band, and the fact that lower commodity prices, stable food prices have not helped consumer demand to recover sharply suggests that there are some issues there.

This of course may be the early impact, we might see some lagged response, we might see some acceleration in the subsequent quarters, but for the moment the picture that we’ve had of a steadily recovering—if not dramatically recovering—economy has to be rethought.

It puts that much more pressure on the government in terms of accelerating reforms, doing things that particularly get investment back on track. I think the big weakness we’ve seen—notwithstanding some of these public expenditure numbers that are coming out—is that there doesn’t seem to be any particular momentum and investment and without that growth acceleration is not going to be achieved.

In the first quarter of this fiscal one had expected the public cycle of investment to have really taken off. It doesn’t seem as if this is likely to happen or has happened in the past three years.
I believe last week the structure of the budgetary intent of the National Infrastructure Investment Fund was put together. We’ll have to wait and see how it plays out. That is going to be a critical piece of the infrastructure puzzle. But for the moment these sort of numbers are worrisome on two counts: On a purely domestic consideration, the momentum seems to be somewhat sluggish but also we’ve had a lot of global turbulence in this quarter (July-September). All other things remaining the same, investment activity tends to be vulnerable to global turbulence and if we see this turbulence persisting for a while, then the prospects of an investment recovery become that much weaker and put that much greater burden on the government to speed up the whole infrastructure and the ease of doing business initiatives, which are the only two triggers for the domestic investment recovery. The global situation is really not going to help. We’re going to be seeing excess capacity in many many tradable sectors and that’s really not going to be conducive to people making ambitious investment plans here.

You spoke about growth in sectors like manufacturing plateauing out rather than improving. If you look at the manufacturing numbers for the first quarter – 7.2% as against 8.4% in the comparable quarter of the previous fiscal – how much of that could have been driven by the fact that exports have not fared too well, and that is partly because the rupee has appreciated, given the global demand has been compressed because the global recovery hasn’t happened. Has the lack of export competitiveness because of the rupee appreciation, could that have contributed to the fact that manufacturing has not really fared as well as we hoped it would?
It’s a complementary factor but I don’t think it’s the only factor. Look at the export basket, and look at the weights of different industries in the manufacturing portfolio, there’s a lot of weight given to sectors like automobiles and capital goods, chemicals is the single biggest immediate aggregator, but exports are really textiles, footwear, some engineering goods—auto components etc.–but the concern is that exports have added to an otherwise sluggish environment, but to me the investment cycle is the most critical thing. To an extent of course exchange rates etc. matter, but mostly it is global demand that is the predominant determinant of exports, but investments are something we have to do domestically. This means making the investment climate more attractive—that is the whole “ease of doing business” approach—and ensuring that there is appropriate infrastructure support, a foundation for private investment, which is where we have been struggling. Unless we put both of these engines into action, we’re not going to get solutions.

Yes, exports have contributed but we should also focus on domestic hindrances to investment activity.

You said we need to kickstart the investment cycle, and you spoke about turmoil in the global world. We’ve always prided ourselves in that India is largely a domestically-driven economy. If there is turmoil elsewhere, should that really impinge on investment within the country?
I don’t think it should. We can certainly shave off a few basis points of growth expectations because of global turmoil. But the substance, the predominant portion, of growth is domestic, and the advantage we have of a large economy, going back to the whole BRICS definition, is that we can use domestic drivers to offset global negatives. In order to do that we have to be that much more aggressive with reforms, with public investment, in cleaning up the plumbing to get domestic investment going. That’s really how we did it in the 2003-2008 period. Yes, global growth helped us achieve that 9% number, but a lot of that came from the very strong domestic forces that were in operation then. To me the one of the most important triggers was the National Highways Development Programme, which put public funding into the creation of an asset which proved to be enormously productive. I think we need to see a repeat of that kind of stimulant which I believe the budget did provide us some basis to do, not through direct public funding—yes, there was direct budgetary support—but also to be able to leverage budgetary support into larger fund flow. We’ve got to get that proves activated as quickly as possible. Without that we’re really risking becoming more and more vulnerable to global turbulence. To me that is the insurance policy. Giving momentum to domestic policy is what is going to help us buffer ourselves against global turbulence, which may persist for a while.

Author

Subir Gokarn

Former Brookings Expert - Brookings India

Executive Director - IMF

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