The gross domestic product (GDP) estimates released by India on February 28 present a stark challenge to the Narendra Modi government’s self-congratulatory narrative.

GDP growth slowed consistently, from 8% in the first quarter of the year (April-June), to 7% in the second quarter (July-September), and to 6.6% in the third quarter (October-December), a six-quarter low. The fourth-quarter growth figure is projected to be less than 6.5%.

The projection for full-year growth, revised downwards from 7.2% in the first advanced estimates released in January, now stands at 7%. This is lower than the 7.4% growth in 2014-15 that the Congress-led United Progressive Alliance (UPA) government bequeathed to the incoming Modi government.

GDP growth at constant (2011-12) prices            

2009-10 7.9%

2010-11 8.5%

2011-12 5.2%

2012-13 5.5%

2013-14 6.4%

Change of Government

2014-15 7.4%

2015-16 8.0%

2016-17 8.2%

2017-18 7.2%

2018-19 7.0%

Overall, the snapshot of the economy drawn by the estimates can hardly be called optimistic. While it is true that, even at 7 %, India’s growth remains ahead of China’s (something that Modi’s narrative never fails to emphasize), this presents little comfort when growth momentum is evidently on the wane.

The overriding message from the estimates is of an economy struggling to break out of the impact of structural issues and policy failures. These range from demonetization to minimum support price hikes (MSP) and public procurement of crops.

The loss of growth momentum is a result of slower growth in sectors in which the majority of the population is engaged: agriculture, manufacturing and services viz. trade, hotels and transport and public administration.

The severity of the economy’s agrarian distress is evident in the estimates. Agriculture value added growth is projected to weaken to 2.7%, compared to 5% in 2017-18. The wholesale price deflator for food items of -0.8% suggests the sector is in dire need of well-planned corrective policy measures. Yet for a long time, the sector has only received government attention in fits and starts, and in line with a political rather than an economic approach. The consequences can be seen in the large swathes of Indian agriculture where, even after bumper harvests, farm returns remain unprofitable. After experimenting unsuccessfully with an MSP-based initiative in last year’s budget to lift depressed farm prices, the Modi government, just weeks before the upcoming general elections, announced a new income support scheme for farmers. The scheme will compensate farmers with up to 2 hectares of land for crashed market prices with annual supplements of 6,000 rupees.

Manufacturing value added in the third quarter is estimated to have moderated to 6.7% from 6.9% in the second quarter and sharply decelerated from April-June’s 12.4%. The sector appears hit on both the demand as well as the supply sides. Private consumption growth eased to 8.4% in the third quarter from the second quarter’s pace of 9.8%, reflecting softening demand conditions. On the supply side, the lingering effects of the disruptions caused by demonetization and the incompetently designed Goods and Services Tax (GST) rate structure and levy imposition and collection systems have taken a toll on manufacturing. An added complication with GST is the constant tinkering in rates and compliance norms that has imposed adjustment and compliance costs especially on smaller firms.
High-frequency and survey-based indicators for the manufacturing and services sectors, such as lean car sales trends during the festive season last year, also indicate a slowdown in the pace of activity.

‘The financing constraints in the economy following the liquidity crisis in the NBFC [non banking financial company] segments could have been a factor weighing down economic growth,’ said Madan Sabnavis, Chief Economist, Care Ratings.

Separately, core sector production growth estimates for January, released on the same day as the GDP estimates, further add to the growing concern over the state of the economy. The eight core sectors that contribute to 40% of India’s total industrial output—coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity— cumulatively grew by only 1.8%. This is the group’s worst performance in 19 months. Notably, electricity production crashed to a 71-month low. The last time electricity production dropped from the previous month was in February 2013, according to a statement from Devendra Kumar Pant, Chief Economist, India Ratings & Research.

That was back at the height of the former prime minister Manmohan Singh-led government’s policy paralysis phase that started in 2011-12. A time when a spate of scams and controversies resulted in a complete freeze in decision-making as bureaucrats worried about investigating agencies viewing every decision with suspicion. In the absence of clear decision-making, projects started stalling.

It was expected that the incoming Modi government would be able to quickly reverse these trends and create conditions conducive for unclogging the pipeline of stalled projects that would quickly come back on steam. Data from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE) shows, however, that the private sector stalling rate is hovering near a record high. The stalling rate, or the value of stalled projects as a percentage of the total projects under implementation was 24% in the third quarter, as reported by Mint newspaper.

New project announcements fell to a 14-year low on account of looming bad debts, rising policy uncertainties ahead of the polls, and the lack of notable progress in adding momentum to stalled projects.

The released estimates capture the dampened investment rate in the economy. Investments, as measured by the gross fixed capital formation, grew 10.6% in the third quarter, slower than in the same period of the previous year (although as a percentage of GDP it was slightly higher).

Clearly, the story of the Indian economy across the two different governments, the Singh-led UPA and the Modi-led National Democratic Alliance, has been one of policy paralysis devolving into complete policy chaos.