Why it’s time for Narendra Modi to get real about the economy

To claim that things are getting better in their tenure, and because of them, is an old prime ministerial habit. A prime minister is undoubtedly a very important person. The office is vested with great authority and there is an aura about the incumbent that often fools even the cameras whose lights seem to caress, rather than expose, the object of their focus.

Our system of government, with so much power of patronage concentrated in one person, ensures that mostly fawning and obsequious people who constantly whip up a lather of simulated adulation surround the prime minister. Prime ministers consequently confuse the power of patronage with the power that ensures compliance. It is small wonder when our supreme leaders start thinking of themselves as King Canute who sought to order the waves about.

The reality is that like the ocean’s waves, economic waves too are cosmically controlled and prime ministers are like King Canute, who futilely waved his hands about. Happily, most prime ministers realise this and make sure they are seen waving their hands appropriately with the tides of growth and the ebbs of inflation. But once in a while we get a leader who actually believes that the waves are obeying him. That is when we enter dangerous waters.

Facts vs feelings

I recently attended an event that Prime Minister Narendra Modi addressed. Unlike most other prime ministers, he came promptly at almost the appointed minute and walked briskly to his place on the dais with his characteristic wrestler’s swagger. He listened as the host, an Englishman with a wry sense of humour, exclaimed how fortunate India is to be united as never before under one charismatic and bearded man. The prime minister looked on expectantly and the audience was suitably primed to roar its approval, when the host added, sotto voce, Virat Kohli. Modi smiled wanly at the denouement.

The prime minister then spoke and, without much ado, took the fight straight to the critics, a few of whom, like me, were seated in the front row. He said:

“For India to be at the top of the growth tables is an unusual situation. Obviously, there are some who find that difficult to digest and come up with imaginative and fanciful ideas to belittle that achievement.”

This is unfair. But it is churlish to say that his critics do so because his government is getting tough on businesses with huge non-performing assets. To be truthful based on facts as perceived does not mean a person takes pride in belittling one’s own country. Is the next litmus test of patriotism going to be supporting the prime minister’s extravagant flights of fancy?

The prime minister’s case is that “India’s economic success is the hard-won result of prudence, sound policy and effective management.” He repeated: “India’s growth rate is acknowledged as the highest among major economies.” With evident sarcasm he added that his critics are confused when they say, “the growth rate does not feel right” and generously offered to alleviate the confusion with “facts in place of feelings.”

Numbers speak

The point here is that no critic of any consequence ever argued that the growth rate “does not feel right.” They have just said that his government’s interpretation of the facts is not right.

Take GDP growth for instance. Few argue that the real GDP growth is 7.4% as the government claims though there have been serious misgivings on how GDP calculations were tweaked to jump growth by a further 2.2%. The problem here is the use of the term real. In the real world, the number that matters is the nominal GDP growth rate, which is a measure of current market prices.

For much of the past decade India’s nominal GDP growth was in the 10%-15% range and corporate profitability growth was also in that range. Since inflation used to be in the 4%-8% range, real GDP was in the 6%-9% range. The present nominal GDP growth is 5.2% and instead of inflation we have a deflation of 2.2% giving a real GDP growth of 7.4%.

But the popular mood is determined by actual accruals and not by economic sleight of hand. In the real world it is the nominal GDP that matters. Corporate sales and profitability are calculated in nominal terms. Everyday commerce and business takes place in nominal terms. Government revenues are collected in nominal terms and levied on nominal incomes or sales. It is not a matter of feeling but the reality of life.

The fact is that 2015-'16 has been a bad year for the Indian economy. In the budget for 2015-'16 the government set a nominal GDP growth target of 11.5%. The nominal GDP growth turned out to be just 5.2%, or 6.3% below target. The real GDP growth of 7.4% is because of the collapse of world commodity prices and has little to do with the government’s so-called “prudent policies.” Comparing apples with oranges can only fool some people for some of the time, but not all the people for all the time.

While on apples and oranges, food inflation is the inflation that matters to most people in this country where the average family expends over 60% of its income on food. This inflation has been well over 25%. The Wholesale Price Index or WPI that the government favours has been in the negative zone because of a huge fall in commodity prices. The prices of oil, steel, cement, engineering goods and many other items that mostly comprise the WPI basket have been falling. The global economy is suffering from a surfeit of overproduction and excess capacity.

Fanciful claims?

In his unspooling of statistics the prime minister made a particular mention of a “smart pick up of credit.” He gave a figure of a pick up by 11.5% in February. Its still March now and it is unusual to get data out that fast. But then a prime minister can always get the data he wants? The fact is that for the last year credit offtake growth for manufacturing has fallen from 21% to 7.1%; construction from 27.4% to 4.1%; mining from 17.1% to a negative 8.2%; industries from 9.6% to 5.2%. Only electricity credit offtake has just about held course by dropping from 13.7% to 12.7%. Maybe February 2016 is the point of inflection. But shouldn’t we wait a bit to see if a trend is in the making?

The prime minister referred to a smart upturn in Foreign Direct Investment and mentioned a figure of $42 billion for the year. It might be so. But Global Financial Integrity, a respected Washington DC based think-tank estimated that last year Indian illicit outflows amounted to $83 billion. Last year Indian entities also officially invested $18 billion overseas as Foreign Direct Investment. So how and where does this leave us?

In his speech, the prime minister also specifically referred to the Pradhan Mantri Mudra Yojana. Jiji Mammen, the CEO of the MUDRA or Micro Units Development and Refinance Agency, claims the agency has disbursed 3.22 crore loans amounting to Rs 1.22 lakh crore. The PM then made the rather far-fetched assumption that every such loan would have created at least one job each. Thus he gets an astounding figure of 32 million jobs created by just MUDRA alone.

One is tempted to dismiss this as just fanciful claims, but in these times when one’s patriotism and professional integrity is apt to be challenged for lesser lèse-majesté, it will be prudent to just say: “Aap ke muh mein ghee aur shakkar." May your mouth be filled with ghee and sugar for giving good news! But it is time to get real too.