Title: Is the Indian economy really that strong?
(The improving fundamentals owe more to favourable external circumstances than to domestic policy choices)
The Indian economy is currently growing at about 7%, after dipping below 6% following demonetisation. It is projected to grow over 7% this year. That is faster than China’s growth rate and makes India effectively the fastest-growing economy in the world.
The Indian economy’s foundations have also been strengthened in the last few years. Inflation has come down to the 4-5% range. Trade balances with the rest of the world have improved, and the current account deficit has come down to about 1.5% of GDP. India has also systematically built up its foreign exchange reserves — now a comfortable $420 billion.
These figures appear to tell the story of a dynamic economy. But is it truly that rosy a picture?
Kinks to iron out
In order for growth to be both high and sustainable, investment has to be strong.
The rate of investment has come down from 34% of GDP in 2014 to about 30% currently. Compared to earlier years, the decline is even more precipitous: the investment rate is now at the lowest level in about 15 years. A decline in investment of this magnitude is difficult to reconcile with a 7% growth rate.
The other kink to the strong growth story is the weakness in industrial production. It was growing at around 6% in 2016, but plummeted to 2% by mid-2017 following demonetisation.
The pace of bank lending has been coming down sharply in the last five years. During 2014-16, bank lending grew at a 10% pace. It is now growing at about 6% following demonetisation. The main reason for the slowdown is the rise in non-performing loans.
These have doubled from about 5% of gross loans outstanding in early 2015 to 10% currently, as the Reserve Bank of India (RBI) has forced banks to classify loans stringently. Consequently, banks are now more hesitant to lend.
If these consistency checks indicate an economy growing at much less than 7%, does it imply that the published growth numbers are made up? I do not believe that the growth numbers are being tampered with to show a strong performance.
There have been improvements in the foundations of the Indian economy through declining inflation, improving trade performance, and strengthening foreign exchange reserves.
On slippery ground
While policy measures have helped control inflation, the decline in inflation has largely been driven by extraneous factors. Food and energy prices are important components of the consumer price index and the decline in commodity prices has had a large role in bringing inflation down.
Oil, gold and coal constitute almost 50% of total imports in India. Over the past few years, India’s trade has gained significantly from steep declines in the prices of these commodities.
Lower oil prices have also benefited the Central government budget through reduced spending on energy-related subsidies.
Final Words
There have been improvements in the Indian economy in recent years. However, the current published growth rate exaggerates underlying strength. The improving fundamentals owe more to favourable external circumstances than to hard domestic policy choices.
Title: Cash is still king
(The sudden cash crunch shows that remonetisation remains a work in progress)
Nearly 18 months after the government’s decision to scrap currency notes of ₹500 and ₹1,000, which accounted for over 86% of the currency in circulation at the time, large parts of India are in the throes of a severe cash crunch again.
The government started acting belatedly on Tuesday in response to reports of cash shortages from States including Telangana, Andhra Pradesh, Karnataka and Madhya Pradesh over a fortnight. Terming the shortage a manifestation of an ‘unusual spurt in currency demand’ over three months, the Finance Ministry has emphasised that the first 13 days of April recorded an increase in currency supply of ₹45,000 crore.
Yet, thousands of automated teller machines are either not functioning or not dispensing adequate cash as banks are reluctant to divert cash to them at the cost of customers visiting branches for withdrawals.
On its part, the Reserve Bank of India has claimed there is enough cash in its vaults, but it has ramped up the printing of all notes. At the same time, it blamed the shortages on logistical issues of replenishing ATMs and said it is moving more cash to regions that witnessed high cash withdrawals.
Theories abound on how upcoming elections, starting with Karnataka and possibly ending with the Lok Sabha polls in 2019, have prompted a large-scale cash management exercise among political parties.
There could be some truth in these explanations, but the genesis of the current cash crisis is firmly rooted in the lack of system-wide thinking that went into the Centre’s big-bang note ban gambit.
The government may have chosen to go for ₹2,000 notes post-demonetisation to remonetise the economy faster, but with lower denomination notes taking longer to flow freely, circulation wasn’t efficient and the big note has become a preferred mode for hoarding capital.
Final words:-
Demonetisation may have been aimed at weeding out black money, but perpetuating dependency on the ₹2,000 note ignores an age-old heuristic for currency management that every denomination should be 2 to 2.5 times its preceding denomination.
Vocabulary words:
Remonetisation (noun) = The process of restoring the status of legal tender
Throes (noun) = Suffering, pain
Belatedly (adv) = Late than should have been the case (देर से ही सही)
Spurt (noun) = A sudden market burst or increase of activity or speed (उछाल)
Dispense (verb) = Distribute or allocate (बांटना)
Reluctant (adj) = Unwilling and hesitant (अनिच्छुक)
Ramp up (phrasal verb) = It is a term used in economics and business to describe an increase in firm production
Replenish (verb) = Restore to a former level or condition
(पुनःपूर्ति करना)
Abound (verb) = Exist in large numbers or amounts (प्रचुर मात्रा में)
Impend (verb) = Be about to happen (आसन्न)
Genesis (noun) = The origin of formation of something (उत्पत्ति)
Gambit (noun) = Scheme, plan
Weed out (phrasal verb) = Clear, clean (साफ़ करना)
Perpetuate (verb) = Make something continue indefinitely (यादगार बनाना)
Heuristic (adj) = Enabling a person to discover something for themselves
Prone (adj) = Vulnerable, subject
Kinks (noun) = A sharp twist (गुत्थी)
Precipitous (adj) = Dangerously high or steep (तेज़)
Reconcile (verb) = Restore family relations between (समाधान करना)
Plummet (verb) = Decrease rapidly in value or amount (गिरावट)
Triumphalist (noun) = An attitude or feeling of victory (विजयी स्वर में)
Paradoxically (adv) = In a seemingly self contradictory way (विरोधाभास से)
Extraneous (adj) = Irrelevant, unrelated (असंगत)
