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Are growth figures overestimated?

Akhilesh Bhargava

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As a result of an impressive growth of 13.5% recorded by the manufacturing sector, the Indian economy recorded a growth rate of 8.2% during the quarter ended 30th June, 2018 This rate of GDP growth was way above the street/market consensus of about 7.6% for this quarter. This growth rate is a bit of a surprise because it is at variance with other related macro economic parameters. A 13.5% growth in the manufacturing sector should mean that industrial production is humming loudly, unemployment should have dropped sharply, bank credit should be at a peak and a slump in any correlated sector should be an exception. But that is not so. Many industries, including textiles, consumer goods/durables, engineering goods, transport, real estate etc. are still in the dumps and have yet to record a sharp growth rate, which does not match the growth rate of 13.5% in the manufacturing sector.

A doubt thus arises about the veracity of this growth rate of 13.5% claimed to have been recorded in the manufacturing sector. Ravindra Dholakia, former director of IIM Ahmedabad and a member of the RBI, Monetary Policy Committee, which sets the interest rates in India, says that India probably overestimated its manufacturing output while calculating economic growth that crossed 8% during the June 2018 quarter. He says that the new GDP series has replaced the Annual Survey of Industries, with corporate financial data, for estimating the manufacturing sector value add, which has resulted in a higher share in GDP and a much faster growth rate compared to the calculation under the older method. He says that the higher manufacturing growth rate gives rise to serious doubts about the veracity of the new estimates and is at variance with other macro economic correlates. He doubts whether this new series data represents a fuller description of the manufacturing value-add and thinks that it could be an overestimation.

Prof. Dholakia’s comments reflect a confirmation in the direct taxes collections during the period April-July 2018. The CAG figures reveal that during this period, as against a target of 14.4%, the direct tax collections recorded a growth rate of 6.6% only, of which corporate tax grew by a mere 0.57%, the lowest growth in tax collections, recorded in the past seven years. And this is despite the fact that there has been a huge surge in income tax returns filed, recording an increase of over 60% during the period ended 31st August, 2018. The government mavens say that the subdued tax collection figures could be due to the large amounts of taxes refunded during this period, but that does not yet explain the huge mismatch between the claim of 13.5% growth in the manufacturing sector and the expected buoyancy in tax collection. In addition to a flat growth in tax collections, the rise in bank credit to the manufacturing sector too remains tepid, adding to the feeling that Prof. Dholakia’s contentions could be correct. If we keep the statistics aside and do a ground level survey, there is little euphoria or confidence in the manufacturing sector, which also raises a question on the government claim that the manufacturing sector recorded a growth rate of 13.5% in the June 2018 quarter.

Indian Economy

Krishnamurthy Subramanian appointed as the new Chief Economic Advisor

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Krishnamurthy Subramanian

New Delhi | The Union Government on Friday appointed Krishnamurthy Subramanian as the new Chief Economic Advisor (CEA) for the term of three years.

Krishnamurthy Subramanian who is the associate professor and executive director (Centre for Analytical Finance) of Indian School of Business, Hyderabad will replace former CEA who resigned from the post on June 20 this year.  Arvind Subramanian who was supposed to retire on as in May 2019 returned to academic research and writing in the US, apart from discharging the new responsibilities of a grandparent. Arvind Subramanian had got an extension of one year in September last year after his tenure got ended on 16 October 2017.

Krishnamurthy Subramanian a Ph.D. from Chicago-Booth currently serves as a member of Sebi’s standing committees on alternative investment policy, primary markets, secondary markets and research. He is also on the boards of Bandhan Bank Ltd, the National Institute of Bank Management, and the RBI Academy.

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Indian Economy

Raghuram Rajan says RBI is a seat belt for govt; autonomy must be respected

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New Delhi | Amid mounting tension between the Reserve Bank and the finance ministry, former RBI governor Raghuram Rajan Tuesday said the central bank is like a seat belt in a car, without which accidents can happen.

Pitching for respecting the institutional autonomy of the RBI, he said the central bank has the liberty to say no if the government pushes it to be lenient.

Ahead of the November 19 meeting of RBI Board, he said the objective of the board is to protect the institution and not serve others’ interests.

“The RBI is something like a seat belt. As a driver, the driver being the government, it has the possibility of not putting on a seat belt but of course if you do not put on your seat belt you get into an accident and the accident can be quite severe,” he told CNBC TV18.

Historically, the relationship between the RBI and the government has been precisely this the government wants to focus on improving growth and it does all it can within the limits set by the RBI which are based on financial stability.

“So, the government will push, will try and get the RBI to be more lenient,” he said, adding the central bank would examine them in close details and in reference to risks to financial stability. “We (RBI) have responsibility for financial stability and therefore we have an authority to say no,” he said.

The RBI led by Governor Urjit Patel and the government have not been on the same page on different issues for some months now. The disagreements came out in open when RBI Deputy Governor Viral Acharya in a hard-hitting speech said failure to defend (rpt) defend central bank’s independence would “incur the wrath of the financial markets”.

It later emerged that the government had used a never-before-used provision of the law to seek resolution of issues, including the easing of NPA norms, so that banks can kick-start lending and support growth, and transferring more dividend to boost liquidity — issues which the central bank thinks cannot be relented.

“Of course the RBI doesn’t say no out of petulance. It says it because it has examined the situation and believes that this take implies too much financial instability,” Rajan said. “I think that relationship has gone on for a long and the fact that the RBI says no is not new. The government can keep asking and say please consider this, please consider that but at some point, it says okay I respect your decision, you are the financial stability regulator and I back off”.

“Once you have appointed these Deputy Governors and Governor, you have to listen to them because that is what you have appointment them for, they are your safety belt,” he said.

On the issue of the government citing Section 7 of the RBI Act that gives it powers to issue directions to RBI Governor on issues of public interest, Rajan said it would be best if each side respected each other’s motivation and thoughts.

“And ultimately the RBI after listening to the government and hearing what the government’s issues were provided the best professional answer it could and historically it has done that. I have no doubt it is doing that today. It has a responsibility to fulfill to the nation. It has to listen of course but at the end of it, after listening it has to make a decision because ultimately it has that responsibility,” he said.

On the role of the RBI board, he said its role historically has not been to take operational decisions but to focus on broader strategy as well as ensure good governance. “So, they are there to ensure that the government’s money is well spent in the RBI, for example, the RBI doesn’t pay itself inordinate salaries and so on but also to serve as a sounding board which is why we have people from different walks of society, very eminent people,” he said.

“So, my sense is the objective of the board is to protect the institution, not to serve others’ interest; it is to protect the health of the institution but also to provide wide, sensible advice. The aim of the board is to be Rahul Dravid — sensible, thoughtful and not, with due respect, Navjot Sidhu,” he said.

On the state of the economy, Rajan said the situation is “much better” on the inflation front, for which both the government and the RBI deserve credit.

Also, India is growing faster than most other countries but there is a need to create jobs and there is “probably need (to do) somewhat more than where we are today.

“Where there is more worry is on the fiscal deficit front and here I am not talking just about the central government fiscal deficit which has been coming down but the aggregate fiscal deficit. Even as the central government is bringing it down, the states are taking it up. When you look at the total you find that over the last 3 or 4 years the aggregate fiscal deficit has actually gotten slightly worse and not better,” he said.

Besides, the current account deficit (CAD) is blowing out partly because of the relatively weak exports and partly because of the price of oil has gone up. “It has come down recently but it is a risk that we cannot ignore at this point,” Rajan said.

On the problems facing non-banking finance companies (NBFCs), he said the central bank needs to examine the liquidity problem much closer and solve the issue by putting liquidity in the market.

“I think the markets are somewhat nervous but I don’t think given that NBFCs account for 17 to 18 per cent of assets, that this is an unmanageable problem. I think we can manage it, we have to look carefully at it, see what is really a solvency issue, what is a liquidity issue.

“Certainly on the solvency front, it is up to these privately managed entities to raise equity at this point when they still have the capacity and shore up their balance sheets. There is a tendency sometimes to run to the government and say please bail me out. I think first they have to exhibit everything they can do on their own before the government even contemplates anything on that sort,” Rajan added.

In general, central banks, he said, avoid lending to direct entities. Lending to direct entities involves credit evaluation and central banks are not in fiscal function of bailing out entities.

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Indian Economy

Rupee does U-turn, nosedives 67 paise against US dollar

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Mumbai | After two sessions of massive gains, the Indian rupee on Monday again tumbled by 67 paise to close at 73.12 against the US dollar on increased demand for the American currency from importers and unabated foreign fund outflows.

On Friday, the rupee clocked its biggest single-day gain in over five years, surging by 100 paise to close at 72.45 against the US dollar. The domestic currency had gained 150 paise in the previous two sessions.

Forex traders said the strengthening of the American currency against major global currencies overseas and weakness in the domestic equity market weighed on the local unit Monday.

After opening lower at 72.76, the rupee plunged to the day’s low of 73.13 and finally settled for the day at 73.12, down 67 paise over its previous closing price.

“The rupee continues to remain under pressure, but the pace of depreciation has slowed somewhat as the crude oil prices have softened in the international market,” Anand Rathi Shares and Stock Brokers Research Analyst Rushabh Maru said adding that “tension still exists between the RBI and government which is a matter of concern”.

Dealers said unabated capital outflows by foreign funds dampened the sentiment, even as easing crude oil prices restricted the rupee fall to some extent.

Foreign funds pulled out Rs 196.90 crore from the capital markets on a net basis, while domestic institutional investors bought shares worth Rs 852.99 crore Friday, provisional data showed.

Globally, Brent crude, the international benchmark, was trading 0.30

per cent lower at USD 72.61 per barrel.

According to a Crisil Research report, the rupee has fallen sharply against the US dollar this fiscal, losing nearly 13.8 per cent during April to October 31, as global headwinds multiplied and the current account deficit widened.

“Risks are tilted on the downside because rising interest rates in the US could continue capital outflows from India, putting pressure on the rupee,” the report noted.

Meanwhile, the benchmark BSE Sensex dropped 61 points and settled below the 35,000 mark Monday, tracking weak Asian stocks amid uncertainty around the China-US trade war. The broader NSE Nifty settled 29 points, or 0.27 per cent, down at 10,524.

The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 73.0740 and for rupee/euro at 83.2566. The reference rate for rupee/British pound was fixed at 94.9845 and for rupee/100 Japanese yen at 64.50.

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