ExplainSpeaking: 11 charts from RBI that explain Indian economic past, present and future

Express Explained

Dear Readers,  Last week, the RBI released this year’s "Report on Currency and Finance". It immediately caught everyone’s attention for stating that as an economy “India is expected to overcome Covid-19 losses in 2034-35”. This statement not only has several implications but is also based on some critical assumptions, which, if tweaked, can make this projection even worse.     Moreover, while most of the attention has been on this one statement, what is perhaps even more relevant is what the RBI report says about the state of India’s economic growth in the lead up to the Covid pandemic.  In both the cases — pre-Covid growth as well as post-Covid recovery — what stands out about the RBI report is the refreshingly candid assessment of the true state of the economy, especially since its assessment is in stark contrast to what the government has been projecting.    The past (or the pre-Covid reality)   Some of the biggest, albeit unnecessary, points of contention in the pre-Covid years have been the government’s unwillingness to accept that:   The Indian economy had been slowing down since the announcement of demonetisation That this slowdown was driven by a slowdown in personal consumption demand That employment had been faltering  Even as the growth rate of wages was slowing down   But the latest RBI report sets the record straight using official data.    1) On overall economic growth, the report “begins by taking a deep dive into Covid-induced downturn in the economy against the backdrop of the loss of pace in activity, evident since H2 of 2016-17 and its structural and cyclical drivers.”    Although it does not specifically name the demonetisation of November 2016, it is noteworthy that the RBI clearly specifies the second half (H2 in the quote above) of 2016-17 — which essentially refers to the period between October 2016 and March 2017 — as the start of the slowdown.     Look at the data highlighted in Chart 1. The GDP growth between 2017 and 2020 was just 5.7% — exactly the same as it was during the last three years of the UPA rule (2011 to 2014).   Chart 1   2) On what was the main cause for this slowdown, the RBI report states: “The pre-pandemic GDP growth has mainly been consumption-led. However, over the years, the share of consumption, the backbone of India’s economic growth, has been declining…”   Regular readers of ExplainSpeaking will recall that private consumption expenditure (PFCE in Chart 1) is the biggest engine of India’s GDP growth, accounting for 55% of India’s annual GDP. As can be seen in Chart 1, the PFCE component had lost its growth momentum rather sharply — from 7.5% to 6.2%.    Chart 2 shows the same reality in a line graph. While other engines of GDP growth such as government expenditure (or GFCE) and investments (or GFCF) were largely stagnant, private final consumption expenditure (or PFCE) was declining sharply.    Chart 2   In other words, people’s demand was decelerating and this was showing up in a broad-based slowdown even before the pandemic struck the economy. Recall, how much of 2019 was dominated by news of sales of different goods such as new cars floundering.     3) and 4) On what contributed to lower consumer demand, the RBI states: “The decline in employment in general, and the depressed employment in the construction sector resulted in low rural wages (Charts 3 and 4). This along with high household leverage in 2017-18 and 2018-19 and domestic shocks pulled down consumption demand.”    On employment, as Chart 3 shows, the declining trend in employment started in 2018 — long before Covid.   Chart 3   Similarly, rural wages lost their growth momentum in late 2017.    Contrast these statements with what the government had been stating during that phase. On employment, for instance, in early 2019, the government tried to run down its own Period Labour Force Survey, which showed that unemployment had reached a four-decade high.    Chart 4   On economic growth, the Budget speeches of this period are a good indicator of how the government was in denial.   On February 1, 2018, then Finance Minister Arun Jaitley said: “When our Government took over, India was considered a part of fragile 5…The Government, led by Prime Minister, Shri Narendra Modi, has successfully implemented a series of fundamental structural reforms. With the result, India stands out among the fastest-growing economies of the world.”   On July 5, 2019, Finance Minister Nirmala Sitharaman stated the following during her first Budget speech immediately after the 2019 general elections: “The people of India have validated the two goals for our country’s future: that of national society and economic growth.”    This divergence between reality and how the government viewed the economy had policy implications. Take, for instance, the government’s decision to provide a massive tax cut to companies via the historic Corporate tax cut in 2019. This was done to incentivise investments and boost the overall supply in the economy. But, as the data has shown above, the problem in the Indian economy in 2019 was that of faltering consumer demand. If the government was not in denial, instead of giving a tax cut to the corporate sector, it could have either used those revenues to boost spending on the poor or given a similar-sized tax cut to average consumers, thus raising their purchasing power and overall demand.    The present   The government’s denial has continued even in the immediate aftermath of the Covid pandemic when it failed to acknowledge the uneven and iffy nature of economic recovery.    Sample what the Finance Minister said during her latest Budget speech earlier in February: “The overall, sharp rebound and recovery of the economy is reflective of our country’s strong resilience. India’s economic growth in the current year is estimated to be 9.2 per cent, highest among all large economies.”   While factually this might have been correct, the truth was that India was one of the worst affected economies during the Covid pandemic — something that the latest RBI report also brings out.    Chart 5 shows that India was one of the worst affected on the economic front.    Chart 5   “A number of factors worked in conjunction to culminate into the most severe economic impact for India, with the stringency of the lockdown as the most cited reason. India imposed one of the most stringent lockdowns in the world in 2020 to curb the spread of the virus. Countries ranked higher in terms of stringency Index – India, Argentina, Italy and the United Kingdom – faced deeper contraction in GDP,” states the RBI report.   But while more stringent lockdowns ruined the economy, they did not prevent India from becoming the second worst-affected country health-wise (see Chart 6). Chart 6   On the health front, there is credible evidence to suggest that India has severely underestimated the Covid death count.   On the economic front, for the most part, the government has been incorrectly promoting the notion that India has staged a “V-shaped” economic recovery. The truth is far from it as shown by Chart 7. Chart 7   In these two charts — one each for aggregate demand and supply — the 2019-20 level has been taken as 100. What these charts show is that, even now, the total demand and supply in the Indian economy have barely increased. “GDP in 2021-22…is estimated to be only 1.8 per cent above pre-pandemic level suggesting lost growth over two years,” states the RBI report.   What’s worse, even this average recovery hides an uneven (or K-shaped) nature of the actual recovery (see Chart 8). Chart 8   Again, on employment, while the government continues to deny the stress in the Labour market, this is what the RBI report had to say: “The Indian labour market witnessed a sharp deterioration during the first wave of the pandemic with unemployment rate touching a record high and the labour force participation rate plummeting”. Chart 9 not only shows the fall in labour force participation rate but also in the employment rate. Not surprisingly, the demand for MGNREGA jobs continues to be higher than even the pre-Covid levels.    Chart 9   The future   The government’s repeated contention has been that India has registered a “v-shaped” recovery. But, as explained in one of the past pieces, an economy is said to have had a v-shaped recovery if its absolute level of GDP goes back to where it would have been had there been no fall. In other words, if the GDP had gone back to the pre-Covid growth trajectory (or path). As things stand, India is barely able to regain the levels set in 2019-20. This point becomes clearer in the next chart.     Chart 10 shows how RBI suspects India’s recovery may pan out. The blue line is the pre-Covid growth path of absolute GDP. The red line is the post-Covid path. A genuine “V-shaped” recovery would have meant that after ducking in 2020-21, the red line would have shot up so sharply in 2021-22 to rejoin the blue line.  Chart 10   What the RBI’s chart shows is that this process will take another 12 years.    But there is a big assumption in what the RBI states: “Taking the actual growth rate of (-) 6.6 per cent for 2020-21, 8.9 per cent for 2021-22 and assuming a growth rate of 7.2 per cent for 2022-23, and 7.5 per cent beyond that, India is expected to overcome COVID-19 losses in 2034-35”   The RBI expects India to grow at an average of 7.5% each year between 2023 and 2035 for India to achieve this trajectory.    But a look at India’s history suggests that this is a very optimistic assumption.    Chart 11 maps India’s growth rate since 1951 while carefully outlining the different phases of growth. In all of India’s history, only during one phase — between 2004 and 2012 — has India registered an average annual GDP growth rate of 7%. Chart 11   To expect that India will grow at 7.5% over the next 12 years when in the run-up to Covid India’s growth rate was decelerating fast — falling below 4% in 2019-20 — is hugely optimistic.    Already, the risks are stacked against it. Take the example of the ongoing war in Ukraine and how it has upended the global economy or the fact that the Covid pandemic isn’t completely over.    Do you think India will be able to regain its pre-Covid trajectory by 2035? Did the government miss a trick by staying in denial about India’s pre-Covid slowdown?    Share your views and queries at udit.misra@expressindia.com     Stay masked, stay safe. Udit   If you received this newsletter as a forward, you can subscribe to it, here.   Do read our other Explained articles, here  | To subscribe to our other newsletters, click here

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PK and political parties

In Our Opinion

Dear reader,   Another episode of the Congress-Prashant Kishor (PK) talks ended last week with PK refusing an invitation to join India's Grand Old Party. The Congress, after extended brainstorming sessions, had set up a panel to discuss PK's prescription to rejuvenate the ailing outfit and invited him to join the show. It is remarkable that the 137-year-old Congress took the help of a poll strategist, who advises party leaders and plans their campaigns for a fee, to figure out what has caused its decline. What is interesting, however, is that the discussions between PK and the Congress went beyond consultations on electoral strategies to discussions on inducting him into a formal role in the party organisation. That's unusual, though PK had once joined Nitish Kumar's Janata Dal (United) only to leave a few months later. Clearly, PK is more open to joining a party than remaining a professional consultant, an event manager for political parties, the event being elections. His notion of a political party seems to be that of a corporate entity with a CEO, which he can join as a lateral entrant and reshape according to his vision. While most political parties, including those that emerged out of social movements with clear political ideologies, have become family enterprises run as per the wishes of a patriarch or matriarch, are they amenable to being run by lateral entrants? What does such a line of thought say about the party? These are the questions that Suhas Palshikar explores in his article ('To PK or not to PK', April 30).   Palshikar writes that "for a party that is on the back foot, spurning the offer of PK's services was a bold move". According to Palshikar, the Congress response to PK was shaped by two factors: One, the baggage of being the oldest party and; two, the self-perception of being the only all-India alternative to the BJP. Also, PK sought an organisational role that would have given him a stature comparable to that of the Gandhis (Sonia, Rahul and Priyanka). Even if the Gandhis were reconciled to this demand, the next layer of leadership would have deemed it unacceptable. The PK episode is to be taken seriously because the party had been all this while failing to act on its own to stall the decline.   For Palshikar, the decline of the Congress at this moment is not merely a crisis of that party but "about the survival of competitive politics and the centrist space that allows the slow but sure march of democracy". The centrist space or the Congress space, according to Palshikar, "is marked by the centrist and non-sectarian tendencies in our public life". He adds, "The failure of the Congress party to own this space has already meant that it either gets disintegrated or is occupied by disparate state-level forces, many of which may eventually be steamrolled by the now-dominant BJP".   This is the context of the PK-Congress dialogue, for Palshikar. While he accepts that the presence of consultants such as PK has become a common feature in politics - a sign of "the professionalisation of politics" and in itself an "an attractive path" - "what happens when a professional strategist crosses the threshold and seeks to become a political actor" is an intriguing thought. Palshikar writes: "In the role as a consultant, we know the 'commodity' called PK but we do not know him as a leader: What are his ideological inclinations? What policies would he prefer for his voters? Does he look upon people as supporters, stakeholders, citizens or just as voters? For that matter, how does a political consultant look upon politicians? Are they merely carriers of the brand or are they human agents negotiating alternative political routes, with dreams of their own? Finally, can a party be rejuvenated by the intervention of a consultant-turned-professional? Does it not require the motivation and human agency of its active workers? Or, are parties set to turn into electoral machines alone?"   These questions need to be discussed. The PK-Congress dialogue is unlikely to be the last of its kind. Increasingly, party chiefs trust the likes of PK, who have no stake in the organisation, than a non-family second-in-command, to plot election campaigns. Even cadre outfits seem to believe that elections are about image building and the projection of strong leaders rather than ideas and ideologies. One cannot blame the likes of PK if they start wondering why they must always stay in the shadows and help someone else enjoy the fruits of their cleverness. Why not, instead, join the race and seek the prize for oneself? This may be delusional since successful parties are not just about leaders - though the latter would want the world to think so - but about cadre work, public outreach, ideology and programmes. This is how the Congress emerged and survived as the party of government for many years; the BJP's record is not very different.   Rekha Sharma, a retired judge of the Delhi High Court, writes on the Supreme Court's intervention in the Lakhimpur Kheri case ('Justice for the Silenced', April 27). The apex court had cancelled the bail of Ashish Mishra, son of Ajay Mishra Teni, a minister of state for home affairs in the Union cabinet. Ashish Mishra and his aides had allegedly driven an SUV, with two other vehicles in tow, into a group of farmers in Lakhimpur Kheri district in UP during protests against the three farm laws and allegedly opened gunfire from inside his vehicle. Four farmers and one journalist had died in the incident, while the driver of the SUV and two others were killed in the clash that followed. Justice Sharma writes that the SC's action and the consequent surrender of Mishra before a local court "have not only served the cause of justice but also given confidence to the victims that their voices will not be silenced as was done by the Lucknow bench of the Allahabad High Court". The apex court upheld the principle that "a victim has an unbridled participatory right, from the stage of investigation till the culmination of the proceedings, and that such a right is substantive, enforceable and another facet of human rights," and "expressed its disquiet over the manner in which the high court failed to acknowledge the right of the victims to be heard", Justice Sharma writes.   Vibhuti Narain Rai ('The return of instant justice', April 29) and Sanjay Srivastava ('A food cart in Jahangirpuri', April 27) write on the sanctity of due process and how prejudiced state action threatens it. Ameeta Mulla Wattal ('A time to revisit the school', April 28) makes a passionate plea to the state to rescue public schooling. Mrinal Kaul ('The one nation, one language fallacy', April 30), Khinvraj Jangid ('Sangam in Tel Aviv', April 30) and Chapal Mehra ('Faiz is in the room', April 28) write on cultural bonds and fault lines that were in the headlines in the past few days.   Thank you, Amrith Lal   The writer is a Senior Associate Editor with the Indian Express Opinion pages and writes on politics, public affairs and culture

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Explained Editor's Note | Centre vs states, UP’s noise pollution argument, and the Baloch resistance

Let Us Explain

Dear Express Explained reader,   After record-breaking heat across the country in March, much of North India has seen a new high in the average maximum temperature in April as well — and the IMD's forecast for May is only mildly encouraging. This has been an extraordinarily hot year so far, and the reason primarily is the near total absence of rainfall due to western disturbances (nor'westers) that periodically put a cap on rising temperatures in the summer.   Temperatures have also been rising sharply between the Centre and states, figuratively speaking. After disagreements over language policy that cropped up again recently, the Prime Minister provoked the states by accusing them of doing "injustice" to the people by not cutting VAT on automobile fuels. Aanchal Magazine and Karunjit Singh explained why letting go of taxes of fuel is easier said than done, and separately, the structure of tax-sharing between the Centre and states.   Another, ongoing controversy between the Centre and states was resurrected after the Tamil Nadu Assembly this week passed Bills that propose to take away the power of the Governor to appoint vice-chancellors of state universities. As justification, Chief Minister M K Stalin repeated concerns that have been articulated earlier by West Bengal and Maharashtra over allegedly motivated interference by Governors at the behest of the central government. Sourav Roy Barman looked at the rules for the appointment of VCs, and the sources of the frictions that have arisen repeatedly.   The government of Chief Minister Yogi Adityanath in Uttar Pradesh has begun a drive to take down or lower the volume of loudspeakers on places of worship. In response to accusations of targeting of citizens based on their religion, the UP government has said that it is only enforcing compliance with orders that were issued several years ago, and directives passed by the High Court to curb noise pollution. Maulshree Seth looked at these legal bases cited by the government for its actions — two of its orders passed in 2018, and a strongly worded judgment of the court demanding accountability in 2017.   A woman suicide bomber targeted a Chinese studies centre at Karachi University this week, killing three Chinese and their Pakistani driver. Nirupama Subramanian wrote about the organisation to which she belonged, the Baloch Liberation Army, the idea of Baloch nationalism that drives it, and why they are opposed to the presence of the Chinese on their land. (Nirupama has been following the activities of the group over the years, and she wrote about them earlier in 2020, when the Karachi stock exchange was attacked.)   Stay safe and stay aware. Keep reading The Indian Express Explained. Some of our content is now behind a paywall, so if you haven't subscribed to The Indian Express yet, this may be the perfect time to do so. Click here to subscribe.   Sincerely,    Monojit   (monojit.majumdar@expressindia.com)    If you received this newsletter as a forward, you can subscribe to it here | Do read our Explained articles here

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From the Explained section       Shah Faesal will return to IAS; what are the rules for resignation and reinstatement of an officer?           What Uttar Pradesh invoked in loudspeaker crackdown: 2017 HC order, 2018 Govt directives           How far could a ban on menthol cigarettes help reduce smoking in India?

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