Why The GDP Is Growing But Not Smiling

Reading portents of elections from very aggregated numbers like gross domestic product (GDP) gives hardly any indication. People vote on how they feel and a rising GDP does not necessarily translate into approval. There is one full year of economic performance to measure ahead before people troop to the booths in April 2019, assuming the general elections are held on schedule. But this is a big pleasant surprise, imagined fears of sops notwithstanding, as this government is not overspending to get back in power.

What does the GDP story tell us, so far? This week’s release of the GDP data for the fourth quarter of FY18 shows the economy is on the mend, consistently. And this is not a mend from post demonetisation. The Indian economy had begun to cool from at least FY14 as this export data shows. So even if the GDP data showed a higher than 7.7 per cent growth for the quarter, it wouldn't change perceptions. Of course, the converse does not necessarily hold — a lower GDP does create ill will. Also, GDP data has plenty of statistical noise. This year’s numbers have already gone through the first corrections and will be revised again in January 2019.

The one metric the Narendra Modi-led government should watch a bit carefully though is the consumption data. Private final consumption expenditure is at 57.8 per cent of GDP for the fourth quarter. Statistical discrepancies, notwithstanding, it is marginally lower than the same period last year. Remember, the fourth quarter of FY17 was the quarter after demonetisation. So a private consumption number in FY18 below the depths of demonetisation is one of the reasons, why the GDP, though rising still feels it has stalled. Read with RBI’s latest Consumer Confidence Survey where the expectations are lower than six months ago, it shows that consumers are still apprehensive about their spending powers.

This in turn means there is a sense of unease among these citizens about what lies ahead for the economy. As voters, this can mean bad news for the party in power.

The Indian economy is a largely consumption based story. That is not surprising. Indian per capita income at $1,939 (FY18 prices) means there is little avenue left for most citizens to save. It is their incremental consumption that companies attempt to skim. The government tries to help. It raises its consumption expenditure. True enough, “public administration” has risen by 13.3 per cent year on year, over a massively high base of 16.4 per cent. Yet, there is a surprise here. (I shall have more to say on this later) If consumers still feel they are a tad worse off and data shows so, the rise in GDP notwithstanding, it is not time for hosannahs for the economic managers.

For the past few quarters it is this slowness in private spend that tells why growth of GDP doesn't feel like a take-off as yet.

Why should consumption be so anaemic? Per capita income has risen but as urbanisation has deepened in this decade, the spectre of job losses big time, has also invaded the first generation of migrants. A disguised unemployment in the rural areas had for decades kept a lid on the problem, but migrants do not get the luxury of disguised unemployment in urban areas. They get jobs only by adding value in both informal and the formal sector. As the much debated Ghosh and Ghosh data shows, jobs are moving big time into the formal sector. But those jobs still have a thin social safety net and in any case are highly prone to being seasonal. Since the jobs are not long term, the sluggishness of consumption bears out the informal safety nets the migrants build for themselves to insulate themselves from the trauma of job losses. So, the massive influx of people into urban or peri urban jobs, which is where most formal sector jobs are located, creates an atmosphere of uncertainty. Slow consumption slows down economy and slows the vote catching appeal of the party in power.

Nothing else explains why despite the smart recovery of GDP why private consumption has not grown along. It may seem politically smart to offer doles in this environment, the urban equivalent of loan waivers. The 7th Pay Commission did essentially that. But this is suicidal. A far better option for the government is to push investment, and as the revival of investment from the core sector data for this year shows, this has finally begun to happen. The infra sector industries recorded a growth of 4.7 per cent in April, an improvement over March when it was 4.4 per cent. It was 2.6 per cent in April 2017.

Of even more salience though is data on government’s budget released on the same day as the GDP was released. The centre’s total expenditure for FY18 has been contained at 96.6 per cent of the budget estimate. It is lower than last year at 98.3 per cent. Again remember, this was a fiscally stressed year. But there has been no imprudent jump in government expenditure to make up for an anaemic economy. As I pointed out earlier in this piece, governments love to nudge expenditure along, when private expenditure does not do its bit. The numbers show Narendra Modi’s team has not done so. The admirable restraint is also one of the reasons, why inflation has not gone out of control.

In sum, the environment in June 2018 does not feel that growth has returned to the economy. While that is a cause for worry, the government is not making it worse by spending beyond its ability. It makes one feel better.