by Harish Gupta, National Editor, Lokmat Group
If you are running marathon but joined the race an hour or so late, it is likely that you will reach the final post 26 miles away some time. But the competition will certainly close before that. A similar fallacy is staring India. When government"s financial data were released last week, and it was found that the Gross Domestic Product (GDP) had grown 7.1 per cent in the April-June quarter, against 7.9 per cent in the last quarter of the previous fiscal, there was dismay and consternation all around.
NITI Aayog chief Arvind Panagariya was first out of the gate to announce that GDP would grow at a comfortable 8 per cent as 2016-17 closes. The official announcement came only a few days later. It was naturally greeted with pensive editorials and stern predictions by experts. The Union Finance Minister, Arun Jaitley was also guarded while expressing confidence in achieving the desired target.
The scenario, however, is not as sorrowful as it seems at first sight. The data released by the Central Statistical Office (CSO) show that the Gross Value Added (GVA) grew at 7.3 per cent in the first quarter against 7.4 per cent in the previous quarter. GDP under the new methodology is calculated at market price while GVA is calculated at factor cost, GDP being GVA plus taxes on products minus subsidies on these. So fluctuations in GVA growth rate may be a more realistic yardstick of movement in the economy than that of GDP. Besides, the manufacturing sector maintained its tempo of growth at 9.1 per cent and services sector at 9.6 per cent, a steady pace thrown off balance by a 1.8 per cent growth in agriculture. The agriculture growth was obviously limping after two successive drought years.
But that hardly suggests that India is anywhere near the final leg of the marathon. It is far behind the countries it treats as "peers", a fact recently rubbed in by World Bank which has ranked India as a "lower middle income" economy, as different from Brazil, Mexico or China, which are reclassified as upper middle income.
India"s current problem is not just legacy but its inner dynamics. It simply does not have enough people in jobs or businesses who have sufficient and regular income for investment as capital. The problem has worsened by the fact that while the government is trying its damnedest to get the wheels of the economy spin again, it is the private sector that seems to have given up.
It is evident in the latest numbers churned out from CSO, showing the Gross Fixed Capital Formation (GFCF) having actually dropped 3.1 per cent in this fiscal"s first quarter, from the same period a year ago. GFCF measures the capital raised through savings; most part of it is as private investment, either personal or corporate. In an expanding economy, about 90 per cent of the capital expenditure, or capex, should come from private sources and PSUs. It has been witnessed that rich individuals, companies and PSUs refrain from putting their money in investments.
There is no other option than to turn to banks for advances. But that is next to impossible these days, given the soaring bad debt of banks in general and PSU banks in particular. Between March 2015 and June 2016, the non-performing assets of PSU banks have increased from 5.4 per cent to 11.3 per cent of total advances. Even till 2014-15, the government-managed banks reported a consolidated profit of ` 30,869 crore.
But the good-health certificate obviously hid alarming maladies that began tumbling out following a rigorous Asset Quality Check under the supervision of outgoing RBI governor Raghuram Rajan. In FY16, PSU banks reported a consolidated loss of ` 20,006 crore after setting aside 115% of their pre-tax earnings for provisioning of bad loans. It was an alarmingly very high number. By the end of this fiscal, as more stressed assets fail the 90-day test, it is likely that public sector banks will face an existential threat.
What India needs are perhaps leaders who can identify more and more labour-intensive occupations for the semi-skilled and unskilled millions
The RBI has begun some smart thinking for businesses to find capital from a non-banking source, for example, corporate bonds. In the developed markets, bonds are a major source of finance. They cost less than bank finance and a booming secondary market offers the buyer a wide choice for exit. In India, bank bosses open their vault without looking at the borrower"s balance sheet and go by his closeness to powerful politicians. Therefore, the RBI's move is welcomed. The current market value of a company"s bond may be a better indicator of its health than the "mantri ji"s" recommendation on its advertisement. So far, the bond market in India has remained hopelessly confined to some state-owned enterprises, with little public trading. The RBI now wants banks to meet their requirement through quality corporate bonds.
But that"s only a possible way forward; it offers no diagnosis nor any lasting remedy. Banks in India are limping because there are no jobs, and without the ability to pay regular EMI, the consuming class is withering. As late as 2000, for every percentage point increase in GDP, it was expected that there would be a 0.39 per cent growth in jobs. Today, the corresponding figure has dropped to 0.15. The term "jobless growth" is now a reality, and tragically so for a country like India with two-thirds of its 1.3 billion people under 35 years. But majority of them are unemployable as only 6% are graduates and 2.3% are technically educated (not qualified) and getting skilled labour is like a pipe dream still. 'Bullet trains' and 'smart cities' may be needed. But what India needs are perhaps leaders who can identify more and more labour-intensive occupations for the semi-skilled and unskilled millions. India is yearning for return of the spinning wheel.
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