If Modi is right on GDP growth, then is the Reserve Bank wrong?

The prime minister lashed out at his critics, but his claims might not be all that reliable.

 |  Angiography  |  4-minute read |   05-10-2017
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Prime Minister Narendra Modi had asked for 50 days to fix the demonetisation-induced woes when he had announced it on November 8, 2016. However 11 months on, as the GDP has nosedived, PM Modi seems petulant, at best, in dismissing his critics on economy, which include two former NDA ministers, Yashwant Sinha and Arun Shourie.

In a speech at the golden jubilee celebrations of the Institute of Company Secretaries of India at Vigyan Bhavan, New Delhi, PM brushed off his detractors saying that it's not the first time that the GDP has dipped to 5.7 per cent growth rate, and that we shouldn't be so critical of BJP's handling of matters economic. He added that the economy was on a firm footing and the "government was committed to reverse this trend" (of slowdown).

PM Modi gave out a series of numbers and assured that the Reserve Bank of India has "predicted 7.7 per cent growth in the coming quarters", adding that there have been increase in sectors such as auto sales, air traffic, air freight, mobile phone subscription, etc. However, how accurate were the Prime Minister's claims?

Let's do a fact-check.

GDP growth rate

PM Modi said that there were eight occasions during which GDP growth rate fell below 5.7 per cent in the previous UPA-2 government. However, as Yashwant Sinha and other economists have alerted us, the Modi government changed the methodology to determine GDP growth rate in 2015, in effect inflating it by two percentage points. If the same methodology is applied to UPA2, their GDP growth rate would be much higher on an average.

On RBI predictions

PM Modi said RBI has predicted a growth rate of 7.7 per cent in the coming quarters. But RBI's own Monetary Policy Committee has made a dire prognosis, revising the valued added growth (GVA) to 6.7 per cent. So if Modi is right, is the RBI wrong?

On demonetisation and cash-GDP ratio

PM said: "After demonetisation cash to GDP ratio has become 9 per cent, down from 12 per cent before November 8, 2016." He added that November 8 would be known in history as the first day of the war against corruption. "It was this government that had the courage to take the demonetisation decision," he said.

However, as many observers and economists have noted, cash usage and cash component in the economy are almost back to the pre-demonetisation level. And even though the cash-to-GDP ratio has come down, the millions of lost jobs, and the shrinking of economy by two percentage points, from 7.9 per cent to 5.7 per cent, were no way to reduce what's essentially typical of all emerging market economies.

On FDI and investment climate

PM Modi said foreign direct investment is rising and FDI inflows in renewable energy, computer and information technology, mining and construction have been steady. However, the PM only mentions certain sectors, and not the overall investment climate, which saw a dip. A report in March 2017 noted how net FDI dropped, and impact of demonetisation was felt. "Net FDI inflow also dropped as higher FDI investment went abroad. The impact of demonetisation was felt largely in outflow of portfolio investment, which has not been so bad in more than a decade. This coupled with large FCNR redemptions squeezed the overall capital account surplus," said Anand Rathi Shares and Stock Brokers to The Economic Times.

Moreover, day after demonetisation diktat, Mint published a report that rued how the FDI inflows were falling in the first half of 2016, in line with other emerging market economies.


PM admitted that he's still getting the feedback. He said: "Three months after GST, we have got feedback on all nitty-gritties. And I have told the GST Council must review all problems now."

However, the GST-induced woes show no signs of coming down, and many reports have documented how the small and medium-size entrepreneurs are facing the brunt of GST, protesting en masse.

As expected, #ModiTransformsIndia trended on Twitter, as if on cue, and pro-regime, pro-BJP handles were found to be repeating the same chunks of texts, with the hashtag. They were called out in no time.

But it seems not just his regime, but the PM himself has got carried away by his own "make-believe growth data".

Also read: Danger at gigs: A musician's dispatch after the Las Vegas mass shooting


Angshukanta Chakraborty Angshukanta Chakraborty @angshukanta

Opinionator at DailyO. Because criticism is the opium of the classes.

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