The state of the economy

Business Standard, 22 July 2024

Let's summarise the state of the economy:

Output
Given the difficulties of the GDP data, it's useful to look to the firm data in understanding the state of the economy. There is a small dataset of 508 non-financial firms where the full-year results of 2023-24 are observed; this shows revenue growth of 4.46% nominal.

Turning to the revenue data for listed firms, where quarterly data is observed, there are three quarters with ample data (Sep 2023, Dec 2023, Mar 2024) where the year-on-year revenue growth was -0.9%, 2.1% and 5.0% nominal. There is a small dataset of 176 firms with data for the Jun 2024 quarter, and the year-on-year growth seen there was 4.3% nominal.
Inflation
In the inflation data, there were brief peaks in headline inflation (year-on-year CPI growth) of about 7% in 2022 and 2023. From middle 2023 onwards, headline inflation has declined and fallen within the range required in the target range specified in the RBI Act of 2 to 6 per cent. Core inflation has decelerated from 2022 to 2024. Drawing on the intuition of the "Taylor principle", we note that when inflation decelerates and nominal interest rates hold still, real interest rates go up.

Debt dynamics in many firms have become adverse (in what is termed an r-g problem) where the top line has grown (with values like 4.3, -0.9, 2.1, 5, 4.3) by less than the cost of borrowing. Numerous Indian firms have responded to the difficulties of the 2011-2024 period by reducing leverage, and for them, this issue is less relevant. But there are a class of firms with debt where this dynamic weighs on the mind.
Investment
There are gains in private investment in the sense that the long decline in the level of projects under implementation (in real terms from 2011 onwards) reached a turning point in 2020/2021. It feels good to see that a turning point was achieved, but the gains are not yet large when expressed in real terms. The stock of under implementation projects in real terms is at the level seen in 2008.

When we turn to the data for year-on-year growth of net fixed assets in the private non-financial firms, there was growth of 2.43% in the pandemic year of 2020-21, 4.49% in 2021-22 and 4.96% in 2022-23 in nominal terms. For 2023-24, there is data for only 508 firms, and the growth in net fixed assets was 4.27% nominal.
Exports
The good measure of exports, that is observed at a monthly frequency, is exports of goods and services excluding oil and gold. This jumped from a pre-pandemic (stagnant) value of $40 billion a month to a post-pandemic level of $55 billion a month which was reached in early 2022. After that, there has been sluggish growth to the latest values of about $60 billion a month. These are nominal USD values; when converted to real USD, the growth rates after 2022 are anaemic.

There are considerable global difficulties. Russia's invasion of Ukraine is the largest high-intensity war after the Second World War. There is the transition into the `third globalisation' [EiE Ep17] where the world economy is seeking to decouple from China, Russia, Iran and North Korea. Populist politics [EiE Ep 44] has been thwarted in some important countries (Brazil, UK, France, Poland), but the most important final exam is yet to come, in the US. Services exports is the engine of Indian exports growth, but this will go through some turbulence in digesting new technological developments. With these factors in play, it will be difficult to get high growth in Indian exports under present policies.

There is a certain internal consistency between the four elements of this picture

This, then, is the macroeconomic situation which must be parsed by private and government decision makers. Strategy formulation in private firms and in government organisations needs to parse this information and construct optimal strategies. It also constitutes the backdrop in which we will obtain a next budget announcement in a few days.

Implications

What can policy makers do? Budget making in India is harder given the lack of trusted national accounts data. The firm data summarised above recommends cautious plans for tax revenues and deficits. Reducing tax rates would be one element in helping to improve the post-tax returns on private investment. The central problem that has given us poor private investment after 2011 is the mistrust of private persons, which calls for an array of policy changes reining in the central planning and improving the rule of law.

There is a contradiction between the return of a near-fixed exchange rate, from 2022 onwards, and the prime purpose of RBI being inflation targeting. It would be better to get back to a flexible exchange rate, which might create space for lower interest rates without needing to defend the rupee.

The external picture features the third globalisation and the problem of Chinese over-production. This calls for reorienting foreign policy and care on imports from China. IT/ITES is India's most important industry. This goes into Western markets and often happens through Western companies. This calls for commensurate respect in the engagement with these countries.

The Indian average tariff needs to get down to the 1 or 2 percent value seen in South East Asian countries, that have gained from the third globalisation, such as Vietnam. Many non-tariff protectionist measures need to be reversed. It is better to solve disabilities of operating in India (e.g. the working of the GST or the capital controls) than to pay out PLI.

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