Context:

The economic growth rate (quarterly) of India has been sliding for the last five quarters from 8% to 7% to 6.6% to 5.8% and now to 5%.

Yet, experts have been talking of a 7% annual rate of growth; every quarter when the rate of growth has been announced, they have argued that things have bottomed out and that the rate would rise henceforth.

Investment rates are not Increasing despite cut in Interest rates in consistent:

• The Economic Survey in 2019 talked of a growth rate of 7% for the current year. The Reserve Bank of India (RBI), in its August policy statement, talked of a slowdown to 6.9%, from the 7% predicted in June and 7.2% predicted before that.
• The Asian Development Bank cut its growth forecast from 7.2% to 7% in April 2019.
• Similar is the case with the IMF which cut its forecast for the year from 7.3% to 7%. So, they all talked of a 7% rate of growth when a year earlier it had fallen below that.
• In June 2019, the stock market was at a record high and yet the investment rate did not rise.
• Data from the Monitoring Indian Economy Pvt. Ltd. shows that investment proposals are at a 14-year low.
• In the last year, the RBI has cut interest rates four times and by a total of more than 1%; but the investment rate has not budged.

Why the government Agencies are not so far off with their estimates:

The reason is that they are not independent data gathering agencies and depend on official data.

So, if official data is erroneous, their projections would also turn out to be incorrect.

Clearly, the government is interested in projecting a good image and so discounts bad news and ramps up data.

Experts argue that if the economy is growing at 5 or 6%, which is historically a good rate of growth, why is investment rate not rising and consumption in the economy stagnant?

The alternative explanation is that the rate of growth is much less than 5%; that is why investment rate and consumption are stagnating or declining.

Where does the problem originate from?

It is from the unorganised sector which has been in decline since demonetisation.

This sector producing 45% of the output and employing 94% of the workforce, has been in decline, which is pulling down the rate of growth of the economy.

It was further hit by the Goods and Services Tax though it is either exempt from it or there is a simplified provision for this sector.

In fact, according to a report by the International Labour Organisation (ILO), the share of informal workers in total employment in India is around 90% (unorganised sector plus contractual workers in the organised sector).

The concerning aspect is that a large number of jobs in the unorganised sector have very low productivity and no job benefits and social security.

There is a large wage differential amongst workers in the organised and unorganised sectors.

Moving towards formalisation of the economy through the goods and services tax (GST) is a step in the right direction, but still there is a long way to go for most workers in the informal sector.

Official GDP figures doesn’t take consideration of Unorganised Sector:

• In simple terms, the reason is that the data for this sector is collected once in five years (called reference years) since the sector has tens of millions of units for which data cannot be collected monthly, quarterly or even annually.
• In between the reference years, the data is only projected on various assumptions.
• The government document on estimating advance annual estimates and quarterly estimates makes this clear.
• For estimating quarterly growth, it uses, “latest estimates of Agricultural Production, Index of Industrial Production (IIP) and performance of key sectors like, Railways, Transport other than Railways, Communication, Banking, Insurance and Government Revenue Expenditure”.
• Except for agriculture, these belong to the organised sector of the economy.
• Even for the annual estimates, basically data for the organised sector are used like in the case of mining, banking, hotels and restaurants, and transport. For construction, steel, glass, etc are used which are also derived from the organised sector production.
• Thus, the implicit assumption is that the organised sector can be a proxy for the unorganised sector.
• But with the economy suffering three shocks in quick succession over the last three years which adversely impacted the unorganised sector, this assumption does not hold true.
• Most of the experts have implicitly accepted the government’s fallacious argument and have thus fallen behind the curve.

According to the latest PLFS report, unemployment amongst urban males with secondary and higher education is at a high of 9.2%, while that for rural males is even higher, at 10.5%. This leads us to question the very edifice of India’s education system.

According to the India Skills Report 2019 (by Wheebox, the online talent assessment company), the employability score of the country is at a low of 47%.

This highlights the need to tune our education system to make it suitable for job requirements.

Conclusion:

The investment rate has hovered at around 30% for the last several years because the capacity utilisation in the economy has been around 75%.

Unless this rises, fresh investment will mean even lower capacity utilisation and lower profitability since capital will be underutilised.

In brief, the official data only represents the organised sector.

To incorporate the unorganised sector, data from alternative sources need to be used.

The decline in the workforce, the rise in the demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act, etc. suggests that the unorganised sector has declined by at least 10%.

If this is taken into account, the current rate of growth is much less than 5%.

If the government does not accept this, then it must reveal the rate of growth of the unorganised sector that it is using in its estimates and which is not based on using the organised sector as a proxy.