But, the bad news is that private investments haven’t picked up the way it should have, while the public investments have remained almost flat. So far there isn’t any strong sign of investment revival. Take a look at the gross fixed capital formation (GFCF) figure, which indicates the investment activity on the ground. For the full year, GFCF has grown by 3.3% compared with 7.9% in the previous year. As a percentage of GDP, the GFCF has dropped to 29.3% from 30.8% in the preceding fiscal. Clearly investment scenario remains weak.
Growth in public spending, which should act as the key driver of growth, marked a sharp drop in growth by 5.4% in fiscal year 2016 compared with 18.45% in the preceding full year, while private investments grew by 12.3% from 10.5% in the previous year. What this means is that the overall investment activity has slackened quite a bit.
Reasons are not very difficult to fathom out. Business confidence hasn’t picked up over the year. This, coupled with stressed bank balance sheets and low capacity utilisation, has held back fresh investments. This also reflects in the sticky pile of stressed assets in the economy.
The key is to keep public spending high in the approaching quarters until the private investments kick in.”Private capex will likely remain the missing link for a few more quarters with growth continuing to be heavily reliant on government spending,” Bhardwaj said. But, the bigger point of worry for the Modi government should be absence of fresh investments.
Non-event for common man
As Firstpost noted in an earlier article, unless the growth percolates to the grassroots, GDP numbers are meaningless to the common man, who still awaits the fruits of the high economic growth. While on the one hand there is a data set that projects a fastest growing economy, on the other is a disturbing picture of a huge deprived population.
For instance, according to a United Nations annual report for 2014-15 released last year, India has the world’s highest number of hungry people in the world. Ironically, we have beaten China here too. India has 194.6 million hungry people compared with 133.8 million in China, of the total of 795 million people in the world. In other words, one-fourth of the world’s hungry population is in India. What does being the citizens of the world’s fastest growing economy mean to them?
“It’s a big issue which is hardly discussed,” said Madan Sabnavis, chief economist at Care Rating. “The deprivation of poor (from the fruits of economic growth) is so huge in India,” Sabanavis said. This is not necessarily the problem of the new methodology, but a larger issue of the inability of the statisticians to assess the quality of the growth in the economy, Sabnavis added. Most economists agree with him, but say there aren’t sufficient alternatives to get a better measurement.
Another concern is weak banking sector, neck deep in bad loans. Stressed assets (bad loans and restructured loans) currently account for almost 11 percent of the total loans given by the banks. If a banking crisis happens, that can put the country in reverse gear for several years, forget about competing with China on the economic growth front. With private investment cycle yet to resume, stalled projects are on the rise and the 17-month consecutive fall in exports do not offer any comfort to the economy.
Looking at a broader picture, there has been no corresponding increase in the number of jobs in the economy aligning with the economic growth the headline GDP numbers have indicated in the recent years. Economists highlight this as a concern since millions joins the country’s workforce ever year and the economic growth should open opportunities for them. This is an issue, which the central bank too have flagged in the past.
As an article in the Mint elaborates, data from the Labour Bureau shows that employment growth plunged to a six-year low in 2015 across the eight key labour-intensive industries and only 0.1 million jobs were created in last year. This is compared with the 0.4 million jobs created in 2014 and even worse than the 0.3 million figure in 2012. So, where has the high economic growth in successive years, whether it is gross value added (GVA) or not, benefited the masses?
To be sure, the Modi government has begun the process of setting the stage for a high-growth phase by addressing the issue of inclusive growth. Its rural-focused schemes, the efforts to streamline the subsidies by plugging leakages and infrastructure investments have the potential to yield results in the long-term. But, at this stage, there are visible weak areas in the economy. There is no reason for us to celebrate over the China-beating growth just yet.