Responding to critics who blame the Narendra Modi-led government for economic mismanagement, especially on job creation, Union Minister Arun Jaitley on Monday came up with a strong rebuttal. In a blog, Jaitley played down criticism targeting the economy and listed the government’s achievements, mainly the structural reforms undertaken in recent years.
Of the multiple things discussed in the blog, let’s look at some key arguments related to job creation and the investment scenario.
Jaitley said: “An analysis of the data released clearly shows that the construction sector is expanding by double digits. It is a job creating sector. Investment is increasing. Domestic investment is also increasing. The FDI (foreign direct investment) is at an unprecedented level. The IBC (Insolvency and bankruptcy Code) is unlocking the value in the Non-Performing Assets. Fixed capital formation is growing. Manufacturing is expanding. We are spending huge amounts on infrastructure creation.”
Jaitley’s claim that the construction sector is expanding by double digits is true if one looks at Q4 data, but it's after 17 quarters that this sector has grown by double digits.
While growth percentages vary, one must look at the share of construction as a percentage of GDP to get a firm trend over the years. The share of construction as a percentage of GVA was 9.6 percent in fiscal year 2012 when UPA II was in power. That number has steadily declined since then to 7.8 percent in fiscal year 2018. The reasons for such a decline aren’t hard to imagine.
Overall, economic growth on the ground has been poor and construction/real estate projects haven’t picked up in a big way. This means that the optimism in Jaitley’s words about the construction sector, as a major job creator, is not really reflected by the numbers.
A report by Assocham and ICRA, titled 'EPC Contracting - Efficiency in Infrastructure Creation', highlights this aspect, saying over the last five to seven years, growth in construction GVA has been lower than the growth in overall GVA, attributing the reasons to a "weakness in aggregate capex (capital expenditure) together with subdued real estate demand.”
Now, look at the manufacturing sector. Here there is certainly some improvement, but not enough to call a significant jump. As a share of GDP, the manufacturing sector contributed 17.4 percent in fiscal year 2012, dropped till fiscal 2015 before showing a mild uptick.
In fiscal year 2018, manufacturing as a percentage of GDP stood at 18.1 percent. Remember, as part of the 'Make in India' campaign, the government wanted to increase the share of manufacturing to GDP to 25 percent over a period of few years, but, after four years, there has not been much progress.
However, a visible improvement is seen in services. From 18.9 percent of the GDP in fiscal year 2012, the contribution of services to GDP has improved to 21.7 percent in fiscal year 2018.
In fact, this is the only segment which has lifted the momentum in GDP growth in a big way, whereas, despite multiple campaigns such as Make in India, manufacturing has refused to pick up significantly.
Although there isn’t data available, services would have likely played a role in job generation compared with construction.
FDI has picked up, but not capital formation and gross domestic savings:
Jaitley is right about a pick up in FDI. As a share of GDP, FDI has doubled in the last five years -- it contributed 1.5 percent in FY14 and grew to 3.1 percent in FY18. But, clearly that isn’t the case with gross fixed capital formation (GFCF), which gives an overall picture about investment activity on the ground.
The share of GFCF to GDP, which was 33 percent to 34 percent between fiscal year 2012 and 2014, has now fallen to 31.4 percent. Gross domestic savings too have fallen as a share of GDP from 34.6 percent in fiscal year 2012 to 32.3 percent in fiscal year 2016, when the latest data is available from the Reserve Bank of India (RBI).
Jaitley is bang on target when he said that the IBC has begun to show results. Just recently, two major cases were resolved under the IBC, paving way for banks to recover money.
There isn’t enough data to make solid conclusions on the jobs scenario, but looking at the empirical evidence available, the scenario is not very promising so far.
The EPFO-model that the government is putting forth is fraught with risks although it shows better results. In an earlier column, this writer had argued that the government’s move to ditch quarterly surveys on jobs to make way for EPFO-based data is risky.
To sum up, Arun Jaitley’s claim that construction has grown in a big way to lead to job growth isn’t quite true. By comparison, the services sector has played a better role in supporting the India growth story in recent years.
(Data contributed by Kishor Kadam)
Updated Date: Jun 19, 2018 14:07 PM