Pessimistic markets

We are going through a strange period in our economic history. The finance minister spoke recently of the possibility of 9 per cent gross domestic product (GDP) growth by India this year. The fact that India is the world’s fastest growing major economy is often cited as a signal achievement of this government. If we go by official statements, India is an island of economic calm in a world of turmoil. And much of the bad economic management of the Manmohan Singh years is now behind us.

Meanwhile, the stock market is below where it was when Prime Minister Narendra Modi took office in 2014. The rupee is below where it was when he took office. And so there is a mismatch between the optimism of the government and the pessimism of the markets.

In a fascinating interview with NDTV’s Prannoy Roy a few days ago, Morgan Stanley’s Ruchir Sharma made the following points about India’s economic prospects. He had studied the world’s economic performance and the data and the indicators told him the following:

First, that growth in global trade had collapsed to zero per cent in 2015. Second, that zero per cent global trade growth historically occurred during recessions, meaning that we were possibly entering a recession. Another indicator of this was the recessions came on average every eight years and by that logic, one was now due.

Third, that India’s exports growth has collapsed to negative 5 per cent. And that it is impossible for India to grow at 8 per cent with exports growing at negative 5 per cent (when India was growing at 8 per cent, exports were growing at over 20 per cent annually).

Fourth, that India continues to be one of the most protectionist countries in the world. Also that little, if any, reforms have been made under

Mr Modi. Of all the world’s countries, India took the second highest protectionist measures in 2015. I was personally surprised by this because we hear so much about the various reforms being blocked by the Opposition, but never about the government actively reversing reforms.

Fifth, that the top 500 Indian companies saw zero per cent sales growth in 2015. Subsequently, their profit growth is likely to be negative for the year ending March 2016. This was the second indicator (along with negative export growth) that our GDP growth was stressed.

Sixth, that there was a dichotomy between the government’s GDP data and corporate performance. Because of this, the Indian government’s data credibility is under question.

There were other troubling indicators. The growth in credit (meaning loans for new economic activity) had fallen. There was enormous debt in corporate India and public sector banks had a high proportion of non-performing loans.

The government has stood by its data and said that certain specific things, like a rise in tax collections, were more credible than the theories being floated around on the basis of speculation. Also, foreign institutions continue to assign high-growth (in the 7 per cent region) to India for 2016. This is creating the strangeness which I referred to at the beginning of this piece.

Are we in excellent economic shape and about to touch 9 per cent growth or are we in poor shape and are slowing down? Is the government committed to reforms or has it spent 2015 undoing reforms? Both of these things cannot be true. It has to be one or the other. Why is there such a difference between the government’s numbers and what Mr Sharma is saying? Why is the market not reflecting the confidence of the finance minister? Is it only because of global cues and not domestic ones?

I do not have any problem accepting the government’s data, but I think the issue is something the Prime Minister will have to address more directly than he has. Each month brings either numbers that are not in keeping with the government’s optimism or they are confusing. For instance, automobile sales have risen consecutively for many months even as exports have declined. And growth in industrial production does not have any predictability.

Even the price of oil may actually not be bringing us the good news we think it is. Mr Sharma says that a further fall in the price (or even it remaining at the same price of around $30 a barrel) is actually bad news for the world’s economy and a sign that there is a recession around the corner.

I am happy to accept that there is much less corruption in this government at the highest levels than there was in Dr Singh’s time. But to me that is only a marginal thing. The most important issue for Indians, the only way in which to get them quickly out of poverty, is sustained high growth. If we are not doing that despite a strong government and a leader with clarity of vision and purpose, we are facing big trouble.