A story in graphs: India’s ‘small government’ grows in size, but economy tanks

Long term graphs often carry distortions because the basis of making calculations is changed, as has been done in the last seven years. The decade-to-decade comparisons therefore can be misleading unless one notes the discontinuities. But for all that, the story that the graphs tell is authentic, the direction they point to correct, even if the scale is slightly distorted.

You will not draw wrong conclusions from the graphs below if one sticks to the context in which they are presented. So, here is the story of the Indian economy in graphs:

First the annual GDP growth in Trillion INR per 2011-12 constant prices. But the data suffers from discontinuities and is presented here only for perspective.

And here are exports as a percentage of the said GDP series.

As you can see, exports lead the GDP growth nicely after the reforms of 1990/91. Both GDP and exports as percentage of GDP moved upwards in sync with each other.

But since 2012-13, exports as a percentage of GDP started wobbling, and tanked inexplicably after 2014, when Modi began to work his protectionist magic on the economy, first through tariff walls of import duties on commodities, and secondly, through a “strong” Indian Rupee that somehow is falsely associated with robust Hindu Nationalism.

Donald Trump too rode to power on the back of a faux nationalism that celebrated a “strong” Dollar. Trump was quickly persuaded by economic logic that a “strong” Dollar hurt the US economy. But Modi and his Bhakts continue to be impervious to economic logic.

As percentage of exports to GDP started declining, so did the GDP growth rate. Below are GDP growth rates since 2011-12 and the corresponding exports as percentage of GDP that show the reversal of the earlier trend.

The growth rate in GVA is from 2012-13 onwards, till data is available. In absolute terms the picture is even worse, showing almost zero growth in exports over the last seven years.

As exports tanked, the rate of growth of GDP fell dramatically, trending back to the maximum that is possible, given the internal domestic savings rate [DSR] of the economy, and the Gross Capital formation [GCF].

You can escape the upper band of the internal constraints only through tapping external savings and with exports to service them. To understand these, let us examine, first the components of growth on the demand side and then the constraints imposed by the savings rate and Gross Capital formation.

GROWTH BY ORIGIN

Here are the annual growth rates by sector. To avoid crowding, I have disaggregated the graphs for clarity. The other sectors follow.

First note that the GDP has dropped off from a growth rate of 8% plus in the 2004-2014 decade to below 5% pa, even before the pandemic. The growth rates for years 2015-16 and 2016-17, Demonetization was in late 2016, are clearly manipulated, first by a change in the basis of calculation/base year change, and second by sheer skullduggery.

For proof, look at the following table taken from the Economic Survey 2021.

Somebody here forgot, or found it impossible, to fudge the export import database in the Reserve Bank. If you look at the series in the 30- year persecutive, never have export-import numbers been so out-of - whack with GDP growth as in the years 2015-2017, when Modi tried to massage the data to show that Growth under him was higher than in the previous decades.

Be that as it may, we can see on the one hand the share of financial industry rising in the overall GVA, and that of manufacturing falling. Manufacturing has never recovered from the shock of demonetization, due to which thousands of tiny firms went belly up, never to return to business.

The resilience shown by finance is discomfiting. In the first 3 years of Modi, it basically reflects the non-recognition of NPAs that were carried on bank books, inflating the value of bank assets and the GVA for that period. The NPAs caused by the pandemic shock have similarly not been recognized in the system.

This is reflected in Finance showing zero growth in 20-21, whereas the rest of the economy tanked by 7.3%. ( See Table above). Fair to say the quality of the data is highly questionable. What is noteworthy is that manufacturing provides about half the jobs in the organized sector of the economy and nearly 60% in the unorganized sector. And this sector of the economy is sinking for the past two decades.

There is a systematic bias towards “financialization” of the economy since 90/91 reforms. This was largely due to mortgage finance being taken out of the ambit of employers, who used to finance housing for employees into a separate mortgage finance industry. It also reflects the broad and welcome trend of households using financial instruments for savings. However, IBC has not prevented larceny of funds from the banking system, whose losses are financed by RBI through stealth taxation of bank depositors by keeping loan spreads very high in the range of 450 bps in real terms.

Such fat banking spreads are unheard of in global markets. This distortion results in the profitability of the financial sector being 3X times that in manufacturing. [in terms of net owned funds]. This further distorts and reduces incentives for job creation and takes the focus away from manufacturing because finance is relatively less labour- intensive now, thanks to technology (and more profitable).

Next take a look at the contribution to the GVA from these sectors, again for a perspective on the lopsided structure of the economy that we are creating.

Here is the share of finance in GVA over the years:

Note the spike in share of finance in total GVA in 2021. That’s because of non-recognition of bad debts triggered by the shock of the unplanned economic shutdown ushered in by Modi through the unplanned lockdown preceded by banging of thalis, and lighting of diyas. Sooner or later, they will be accounted for but nobody will adjust the over-stated GDP caused by unaccounted bad debts.

Here is how manufacturing performed:

What is left to say? Given Modi’s protectionism, the inefficient sectors of the economy are reaping windfall profits while the competitive sectors of the economy that export their output are suffering.

Take the two and three-wheelers manufacturers who enjoyed a large export market. As deep-drawing sheet metal prices go up due to high tariff walls, steel majors got busy raking in high margins of profit while raw material prices for auto-manufacturers went through the roof. The net effect was that the auto-industry, that adds more value to the economy and employs more people, suffered from shrinking export profits while resource intensive and inefficient steel producers enjoyed a bonanza. They had been busy raising prices even as the demand shrunk.

Services have continued to grow modestly under Modi’s Domestic Champion doctrine of growth largely because he has left them untouched. The one sector here that was responsible for the high growth rates in the previous decades was real estate. This was largely due to urbanization around small towns that converted agricultural land for urban use. This unleashed huge amount of monetary demand in the economy, some times as high as 20 to 30X the book value of the property, that fueled consumption demand, and also some inevitable inflation.

Modi shut down this urbanization with RERA and the sector tanked, as did associated urbanization. RERA was a good move but you need reforms without disrupting markets needlessly. I don’t think growth will return to the sector in the near future. This is another unintended casualty of Modinomics.

And lastly, here is Modi’s glorious “small Government” that he promised to usher in:

In keeping with the genius or perversity of Modinomics, the “small Government” is the only sector that has continued to “grow”. Its “growth” is a drain, an increase in unproductive expenses, which do not earn anything. It has continued to grow because it uses the sovereign danda to finance itself.

As a result, combined Govt. debt has now touched 90% of GDP and RBI is generously working the printing presses to create money out of thin air to keep Narendra Modi’s “small Govt.” growing, even as he tries to dress up his subterfuge in Centre-state “bhagidari,” which has come to mean stealing from states’ share of revenues, such as those from excise on petroleum products.

Meanwhile, Modi diverts all Govt. spending to 4 and 6 lane highways for showing off “development” while feeder roads from villages to state & central highways suffer neglect. This does little to integrate villages and small towns to the larger economy that would greatly enhance rural productivity.

Modi prefers bullet trains and central vistas over productivity enhancing rural roads & and rural housing that would create a lot more jobs and incremental consumption.

But you are an anti-national urban Naxalite if you point to this simple ‘Return on Investment’ criteria of public spending. What India needs desperately is value-for-money productivity. What we get is Narmada waterfront & Central Vistas, that is when it is not statues and Mandirs for more prayers to the Gods for divine prosperity.

Overall, Modi lacks a vision for growth that focuses uniquely on abysmal Indian productivity in agriculture, manufacturing and services. We invest huge numbers in basic things like Railways, but will not build the needed over-bridges and transit ways needed to step up productivity of ordinary users of the system. We simply don’t measure end results.

Meanwhile, Agriculture saved the day for Modi during demonetization and the pandemic shocks:

In keeping with his genius for perversity, Modi has declared war on farmers just as agricultural commodity cycle is turning up globally, after two decades of a deep bear market. Not surprisingly, the agenda was to hand over wholesale and retail trading in commodities - cereals, but also sugar, cotton, tobacco - to tycoons and wait for the bonanza in bullish global markets. Farmers are resisting what Modi calls “reforms.”

As you can see, it is the only sector doing relatively well, thanks to export markets and generous subsidies for sugar exporters just before markets turned bullish. Exquisite timing. Even traders don’t cut it as fine as the babus who set Indians import-export regimen. Who says babus don’t understand markets? It all depends on which side their bread is buttered.

A brief survey of all sectors of the economy by origin of industry reveals no hidden treasures that can be unleashed to produce economic growth, except monetization of agricultural land.

But with Modi at war with farmers, and given his lack of understanding of land-use reforms, such monetization to add 2 to 3 percentage points per annum to India’s GDP growth, that China used to win rural support for its economic reforms, remains a distant dream.

Modi tried to pass on the undervalued farming land to tycoons in his term but was thwarted. He is unlikely to command the kind of trust required from farmers to attempt land-use reforms.

Do note, however, that Modi could have offered to free agricultural land from price & use controls, in return for ending subsidies, but such is greed that he expected farmers to let go of INR 2 trillion in income just to be happy “nationalists.

(The writer is an independent trader. Views are personal)