Does the RBI Governor have a case for revising the GDP growth upward to 7% for FY24 – earlier projection of 6.5% – which he did on December 8, 2023?

To know the answer, one would have to look closely at his list of indicators showing improvements: “two-third of rabi sowing” in Q3, manufacturing, services, GST collection, FMCG, public sector capex, private investment and bank credit outflows.

At the risk of repeating, these are all high-frequency formal sector indicators – which don’t take into account informal sector contributing nearly 50% to the GDP, over 90% of employment and growing by the year (explained a little later), except for the knowable part of agriculture (“two-third of rabi sowing” in Q3).

First, what the knowable part (rabi sowing) hides:

  • Rabi crops are never sown in Q4 (January-April) and “two-third” sowing in Q3 means 33.3% less sowing.

  • 2023 monsoon, which triggers rabi sowing, was below normal and highly erratic. The IMD report “End of Season Report: Southwest Monsoon 2023” said, the rainfall as a whole was “94% of its long period average (LPA)” and 91% in June, 113% in July, 64% in August and 113% in September (of the LPAs for each month).

  • October, November and early December of 2023 (Q3) saw warmer than normal days and so would be the rest of winter. The IMD’s forecast says: “During the upcoming winter season (December 2023 to February 2024), above normal minimum temperatures are likely over most parts of the country”. Warmer than normal winter means grain formation would be impacted and the rabi yield would be less than normal.

  • Centre has banned/restricted export of wheat, rice, pulses and sugar and onion until March 2024; stocking limits for wheat has been reduced from 3,000 ton to 1,000 ton in the past few months. A part of these moves is dictated by the general elections in 2024 but the real reasons are (i) high food inflation and (ii) overestimated crop yield – forcing, in September 2023, Finance Minister Nirmala Sitharaman and food and public distribution secretary Sanjeev Chopra to seek reliable estimates.

The RBI Governor is oblivious to all the above.

Informal sector rising

Informal economy can’t be ignored while talking about growth. The last time the Centre quantified informal sector’s contribution was in its “Report on Employment in Informal Sector and Conditions of Informal Employment (2013-14)”, released in January 2015. It said: “While the informal sector contributes around half of the GDP of the country, its dominance in the employment front is such that more than 90 percent of the total workforce has been engaged in the informal economy.”

No update is available after 2013.

What is known is that the twin shocks of demonetisation and GST (2016 and 2017), followed by the pandemic (2020 and 2022), caused massive damage to informal sector – but the extent hasn’t been estimated. Informal sector’s employment share is known. The annual PLFS reports between 2017-18 and 2022-23 show a massive shift from formal (high-productive and high-paying) to informal (low-productive and low-paying) – across the economy.

Manufacturing jobs (best quality jobs) went down from 12.1% to 11.4%.

·    Agriculture jobs (low productive and low paying) went up from 44.1% to 45.8%.

·    Services jobs (a mix of good and bad) fluctuated between 41.7% and 44.4%.

·    “No” social security numbers for best quality jobs (regular wages/salaried) went up from 49.6% to 53.9%.

·    In category-wise employment, most vulnerable self-employment (euphemism for joblessness and unpaid work) went up from 52.2% to 57.3%.

·    “Proprietary and partnerships” firms of households in no-farm sectors (classified as informal) went up from 68.2% in 2017-18 to 74.3% in 2022-23.

Taken together, it points to declining productivity, wages and social security – and hence poor demand and poor growth prospects. These are ignored too.

Contradictions in assessment

By listing growth in bank credit, the Governor contradicts himself and the RBI.

For better part of November and December 2023, both have expressed serious concerns about high growth in “unsecured” personal loans and banks’ high lending to shadow banks (NBFCs). The Governor asked “banks and NBFCs” to address “the build-up of risks” and “institute suitable safeguards”; the RBI’s Centre for Advance Financial Research and Learning (CAFRAL) flagged NBFCs for “systemic contagion”, “risk-taking behaviour” (investing in stock market) and “significant fall in reserves and surplus” and the RBI raised capital to risk-weighted asset ratio (CRAR) for both banks and NBFCs by 25 percentage points to 125% – back to the 2019 level.

Fortune India has flagged that personal loans are driving credit outflows since November 2021 (“India’s growth prospects anything but bright”), surpassing credit to industry, particularly large industry, and services. The Governor first spoke about “very high growth” in personal loans on October 7, 2023 – two years later.

About private investment, the Governor contradicts the CEA, V Anantha Nageswaran, who expressed concerns at sluggish private investment on December 7, 2023 (at a CII event) and asked private sector not to wait for “uncertainties to abate or recede” because, he said, “this decade is going to be the decade of uncertainty”. In September 2022, Sitharaman had wondered why private investment wasn’t reviving despite (i) corporate tax cut of 2019 and (ii) PLIs since 2020; told them the story of “Hanuman” to inspire. She had not mentioned (iii) import barriers raised since 2014 to protect domestic industries from outside competition and spur domestic production.

Private GFCF has fallen from 16.8% of the GDP in FY08 to 10% in FY22 (up to which data is available) and the RBI’s “envisaged” investment data for FY23 and Q1 of FY24 also reflect declining trend (“Is private investment in the economy on revival path?”).

Public sector capex (public GFCF) is stagnant at about 7% of the GDP for the past 11 fiscals up to FY22 (up to which data is available). The Centre’s total budget spending until October 2023 (CGA data) is 53.2% – less than 54.3% in the corresponding previous year. Post-2023 budget, electoral freebies have reached new highs (LPG subsidy, “free” ration extension, subsidized ‘Bharat Atta’, new tribal welfare scheme, fertilizer subsidy etc.) which would push fiscal deficit and force the Centre to cut public capex (going forward).

The status of other listed indicators is no better.

Misplaced optimism

Manufacturing growth: Manufacturing GVA growth went up by 13.9% in Q2 of FY24 but this was due to abysmally low base of -3.8% of the corresponding quarter of FY23. In Q1 of FY24, it grew by 0.9%. In the entire FY23, it grew by 1.3% (negative growth in Q2 and Q3 of FY23, at -3.6% and -1.1%, respectively). These are below par even for the slowest growing agriculture.

The Governor highlights the PMI for manufacturing, which went up to 56 in November 2023. But he overlooks that it consistently fell from 58.7 in May 2023 to 55.5 in October 2023 and the November number (56) is a mere 0.1 percentage point higher than that of October 2023. Here is another point to ponder: The manufacturing PMI was at high 58.9 in October 2020 (FY21) – the fiscal in which the GDP collapsed to -6.6% (later revised to -5.8%). How reliable then the PMI numbers are as growth indicators?

Capacity utilisation (CU), as per “early survey results” for Q2 of FY24 (not yet released), the Governor said, is 74% – up from 73.6% in Q1 of FY24 and above long-term (FY09 to Q1 of FY24) average of 73.7%. Again, what he doesn’t reveal is more important: the rise in Q2 of FY24 is marginal (0.4 percentage points) and CU had fallen from 76.3% in Q1 of FY24, 74.3% in Q4 of FY23 and 74% in Q3 of FY23.

A far better measure is the IIP manufacturing (actual production) – which is missing from the list because it is low and declining. During H1 of FY24 manufacturing IIP grew at 5.7% – far lower the overall GVA growth of 8.7% at current prices and 7.6% at constant prices (average of Q1 and Q2 of FY24). In September 2023, it fell to 4.5% – the same as for FY23 (falling to 4.5% in FY23 from 11.8% in FY22).

The October’s IIP numbers were released after the Governor’s December 8, 2023 list (on December 12, 2023), showing a growth of 10% over abysmally low base of -5.8% in October 2022.

The RBI data on (manufacturing) order book and inventory are missing from the list. The data up to Q1 of FY24 shows, growth in “new order book” fell to -1.3% in Q-on-Q and to 1.5% in Y-on-Y; “inventory/sale fell from 64.1%in Q4 of FY23 to 63% in Q1 of FY24.

Services sector: High-frequency services data (e-way bills, railway freight, toll collections, port traffic etc.) are unsuitable indicators of growth because they rise over time, unless hit by natural or man-made disasters. Also, high toll-tax and diesel tax collections are due to predatory pricing (no tax haven-like DTATs to help vehicle owners who pay advance road tax and no relief for consumers from cheap import of Russian oil). The PMI for services is also missing from the list, which fell to 56.9 in November 2023 – from 61 in September 2023, 62.3 in July 2023 and 62 in April 2023 (FXEMPIRE).

GST collections: The GST (indirect tax) numbers are unsuitable growth indicators for similar reasons: grows with time, higher inflation and tax on food items (exempted earlier). Better indicators are: (i) gross tax-to-GDP which fell from 11.4% in FY22 to 11.1% in FY23 and FY24 (BE) and (ii) tax base (ITRs declaring taxable income) has shrunk by 54% in seven years between FY16 and FY23 (“GDP growth: Headwinds in financial assets, tax filings hurt average Indian”).

FMCG growth: Overall FMCG sales (in volume) have picked up in the first three quarters of FY24 (3.1%, 7.5%, 8.6%, respectively) – but this is (a) due to low-base effect as the corresponding sales (volume) in FY23 were negative (-4.1%, -0.7% and -0.6%, respectively), as per the NielsenIQ which the RBI Governor uses (but ignored). What he also ignores is (b) distributors’ revelation that persistent low demand has led to rise in their stocks (inventory days doubled in some cases), forcing them to push excess stocks to retailers and extend higher credit periods to retailers (45 days) – in pre-Diwali period.

What more RBI Guv ignores

Strange that the RBI Governor first expressed surprise at “elevated” core inflation in his April 2023 (MPC) statement and repeated it in his December (MPC) statement (“continues to be sticky”) – which is despite a fall in input cost and headline inflation (CPI) – without explaining ‘why’ even once. Not just globally, even in the Indian context, former RBI Deputy Governor Viral Acharya explained (using extensive data) that this was due to predatory pricing by Big Businesses (the Big 5 for India are the Reliance, Tata, Birla, Adani, Bharti groups) as their concentration across industry and pricing power grows (“Pricing Power Behind High Inflation?”. Core inflation continues to be sticky in November 2023 (over 4%).

But that is not the only trouble.

The RBI Governor has never addressed a big concern for non-government economists: Overestimated growth in the 2011-12 GDP series by 2.5 to 3 percentage points. Former CEA Arvind Subramanian and economist Ashoka Mody have flagged this many times since 2019, the last being in September 2023 (“What is hurting India's exports engine”). The MCA-21 database (self-populated by industry) which provided the manufacturing and services numbers for the 2011-12 GDP series (released in January 2015) remains deeply flawed even now. The Governor has also kept silence on skyrocketing income inequality – reflected in inverted sales of cars, smart phones, houses etc. (“What gets missed in India’s growth indicators”) – which makes growth unsustainable.

The upward revision in the growth estimate for FY24 is, therefore, based on selective data.

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