Why economic crisis will continue to haunt us in Modi's India

The government needs to understand that the situation is serious.

 |  5-minute read |   04-01-2018
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The Indian economy is not doing too well.

The Indian Express reported today (January 3) that “India’s manufacturing sector expanded at the fastest pace in five years in December 2017 on the back of a higher inflow of new business and a rise in output growth". But this growth that was announced by “the Nikkei India Purchasing Manufacturing Managers’ Index” was a survey of only some commercial vehicles sales of Tata Motors, Ashok Leyland and Eicher, a very small sample of the economy, even smaller than the much larger car and two-wheeler sales.

Yet the same survey conceded that, "the manufacturing sector continued to face some strain on the pricing front owing to (the) introduction of the Goods and Services Tax (GST) regime which led to the sharpest rise in input cost inflation since April".

It further notes that “the sector continues to face some turbulence as delayed consumer payments contributed to greater volumes of outstanding work. On the price front, July’s GST continued to lead to greater raw material costs with input cost inflation accelerating to the sharpest since April, according to Aashna Dodhia, economist at IHS Markit and author of the report".


So the economic forecasts and results are not so rosy after all, if you read the entire report. A relatively small sample of industry has bad news despite the initial spin on the commercial vehicles sales. What does the Central Statistics Office (CSO), which follows all significant data on the economy find? Looking at the Index of Industrial Production (IIP), the statistics reveal that the growth rate of IIP decreased to 2.2 per cent in October 2017 from 4.2 per cent a year ago, that is, to almost half.

The trade deficit widened to a 35-month high of $14.1 billion in October 2017, whereas it was only $11.1 billion a year ago. Merchandise exports declined for the first time in 13 months by (-)1.1 per cent to $23.1 billion, and imports increased by 7.6 per cent to $37.1 billion respectively, in October 2017, against $23.4 billion and $34.5 billion respectively, in October 2016. Further bad news was that oil imports were higher by 27.9 per cent at $9.3 billion.

The Modi government had earlier mooted a proposal that they would reduce the fuel price by Rs 2 per litre in the GST Council. But with the oil imports going down, it appears that this option has been delayed, if not shelved. Things are not better on the food price front. The Wholesale Price Index (WPI) inflation rate increased to 3.6 per cent in October 2017, from 2.6 per cent just a month ago in September 2017, and by 1.3 per cent a year ago.

The index for food articles increased by 4.3 per cent in October 2017 from 2 per cent in September 2017, to 3 per cent in October 2016. The rise in the index for fuel and power was up by 10.5 per cent in October 2017, against (-)1.2 per cent in the corresponding period last year.

There are even more damning statistics, but the fact that official statistics are so grim, is a clear sign that the economy is under stress. The rise in fuel prices will hit freight charges in the railways and trucking. In the rural areas, the costs on running tractors and using water pumps will go up. All transport costs will go up.

The significant decline in exports and rise in imports will increase the stress on the economy. Despite the prime minister’s “Make in India” policy, exports are not increasing anywhere near what the PM and finance minister hoped would be the case. Some of this is due to external markets which are controlling imports, including transfer of technology.

In such a situation, the Modi government should consider fresh measures to reduce shortfalls, deficits and slowdown of growth in all possible areas, not just for important sectors. In an economy where many poor are below the poverty line, or marginally above it, the rise in food prices is very serious. Slippages, including failures to provide the minimum wage rate to the rural poor in time, must be tackled on a war footing. In several years, the MGNREGA funds have been slow in reaching the rural poor for more than a month.

This is a very serious issue as the poor have very few resources to store for difficult times. The lack of proper information of what is the real situation and continuous monitoring is absolutely essential.

The government may consider tweaking some policies to improve quick delivery. The situation is serious, and should be resolved accordingly. We should remember that Jean Dreze and Amartya Sen some years ago in their book, An Uncertain Glory, estimated poverty in 2013 in India to be 68.7 per cent using the purchasing power parity method (which estimated the real value of currencies based on their comparative purchasing power). This may have decreased. The famous economist, Thomas Piketty, has estimated that the very rich in India are a relatively small stratum compared to the middle class. These statistics, and others seem to bear this out.

Also read: India's economic crisis will divide us further in 2018


Kamal Mitra Chenoy Kamal Mitra Chenoy @kamaichenoy

The writer is an academic and activist.

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