For a prime minister who came to power promising a better deal for the youth and a re-invigorated economy, the news of large-scale retrenchments in the information technology/ business process outsourcing industry is certainly not an ideal anniversary gift. As the Narendra Modi government completes three years in office, its sense of satisfaction at having steered the economy out of the morass it was in will be dulled somewhat by the acknowledgement that there are some problems it still has not been able to get a grip on.
One of these is undoubtedly the jobs scenario. In spite of breathing new life into the skill development initiative of the United Progressive Alliance government (UPA), in spite of Make in India, Stand Up India, Start Up India, in spite of a slew of business-friendly policies (incremental and bold), the employment data refuses to present a bright picture.
The new series of Quarterly Employment Survey data, starting from April 2016, shows the highest jobs addition in a quarter has been of 1.22 lakh between October 2016 and January 2017. In the April-July 2016 quarter, only 77,000 jobs were added; this fell to 32,000 in the July-October quarter.
The construction industry saw a decline in jobs. Maruti Suzuki’s factories now have robots for certain tasks, with each robot doing the work of four persons. Automation levels in factories are only set to increase. This is not good news – construction and manufacturing are two sectors that are the first stop for people getting out of agriculture.
Employment isn’t the only disappointment on the economy front. New jobs will come with new projects or expanding old ones. But where are the new investments? The investment-GDP ratio has been falling steadily – from 30.8 percent in 2014-15 to 26.6 percent in 2016-17.
Why would companies invest in expansion projects when their existing capacities, far from being over-stretched, are not being utilised fully? According to the Reserve Bank of India’s last Order Books, Inventories and Capacity Utilisation Survey (OBICUS), capacity utilisation refuses to move out of the 72-74 percent range; it declined steadily from 74.6 percent in the fourth quarter (Q4, January-March) of 2015-16 to 72.7 percent in Q3 (October-December) of 2016-17.
The financial sector is not quite in the pink of health. Latest data from the RBI show that at 5.08 percent, credit growth in 2016-17 was half of what it was in the previous financial. And though there are serious attempts at tackling the non-performing assets (NPAs) problem, stressed assets are still high – 12 percent in the case of scheduled commercial banks and 15 percent in the case of public sector banks.
So, is it all gloom on the economy front, as these facts suggest? Certainly not.
The economy may not be close to 8 percent growth mark that was promised, but there is no getting away from the fact that India is an outlier - in the positive sense – in the global economy, continuing to grow upwards of 7 percent when other economies are either floundering or just about beginning to pick themselves up.
Inflation is no longer in double digits; it is now around 5 percent. The current account deficit is down to around 1 percent. The rupee is less volatile. Fiscal deficit targets have been adhered to. More importantly, the quality of the deficit is improving, with the share of capital expenditure in total expenditure increasing (though revenue expenditure is still the largest chunk). Exports were worrying for some time – growth remained in the negative zone for more than a year but things have started looking up now. Latest data on agricultural production show record harvest of food grains.
The Sensex breached the 30,000 mark less than a month back. At a time of a global investment slump, foreign direct inflows increased by above 20 percent a year in 2014-15 and 2015-16. Inflows in the April-December 2016 period, at $ 48 billion, were close to 80 percent of the inflows in the whole of 2015-16. The government certainly has reason to grouch about rating agencies refusing to upgrade India from junk status.
The inevitable riposte this will invite is that a lot of these positive developments have happened not because of this government but in spite of it. Inflation came down because global prices, especially of oil, plummeted. The rain gods, rather than Modi, should get credit for agricultural growth. The export slump and nascent recovery have to do with global demand fluctuations. Okay, the fiscal deficit has been contained, but the government doing the heavy lifting on capital expenditure is not necessarily a good sign.
Well, the critics may have a point on agriculture and exports - policy initiatives have been taken on both, but these will take time to deliver significant results. The softening of oil prices did help the fight against inflation, but it would be churlish to say the government did nothing but ride on this good fortune. It did put a lid on procurement prices (steep hikes in this had pushed up food inflation during the UPA years); it adjusted buffer stock norms so that the government was not sitting on huge piles of food grain; it released excess stocks into the market, among other things. And an inflation targeting mechanism is now in place.
Indeed, the government has not messed up in a big way. That may seem like a startling statement for many – what about Operation Demonetisation, they will demand to know? Well, the jury is still out on whether this was The Most Visionary Step in Indian History or The Most Retrograde Step in Human History. The economic benefits as well as costs are still unclear. One will have to wait for the growth figures for 2016-17 that will come at the end of the month. But let’s not forget that the Economic Survey has pointed out that some of the negative effects could come after a lag.
Demonetisation may be a subject of polarised debate, but the divisions over this government’s other successes will be less sharp. The goods and service tax (GST) is finally all set to roll out, sooner than later. The Bankruptcy and Insolvency Code is in place. Serious action to address the NPA issue is happening. The much-needed subsidy reform has been initiated, not perhaps by drastic pruning of beneficiaries as fiscal hawks may want but with a focus on improving delivery of welfare.
Financial sector reforms have been initiated, though the pace of implementation is patchy. There have been other incremental reforms - like pushing ease of doing business and changes to the arbitration law – which can be pretty far-reaching in their impact. And there is a clear focus on infrastructure. These may not yield immediate benefits in terms of growth but will provide a more solid ground for sustainable growth.
It would be wrong to use these successes to gloss over the weaknesses in the economy, just as it would be wrong to flag these weaknesses and say the successes don’t matter. The lack of jobs, non-existent investment, ailing financial sector are not testimonies to the failure of this government on the economic policy front. What they show is that growth is still on slightly shaky ground. There’s a lot that the Modi government still has to do to sustain this growth. Will it do it in the next two years? One can only wait and watch.
Updated Date: May 16, 2017 10:51 AM