Economic slowdown: Govt is curing problem from wrong side, says Pronab Sen

The economy needs to grow by 12 per cent at current prices in dollar terms to make India a $5 trillion economy, says Sen

As the gross domestic product (GDP) growth fell to over a six year low of 5 per cent in the first quarter of the current fiscal year, former chief statistician Pronab Sen attributed this to satiation in demand from the middle and upper middle class and distress in the rural sector. Sen tells Indivjal Dhasmana that the government is curing the problem from the wrong side. Edited excerpts:

Were low Q1 GDP numbers expected or did it come as a shock? 

Not much of a shock. I have been saying for a while that what demonetisation did was that it gave unnatural boost to the corporate India. That is why you recorded those growth rates in the first couple of years. As the non-corporate sector starts picking up, they are going to occupy some of the market space that the corporate had shed. I think that happened to an extent. But that did not happen as enough to dramatically alter the job scenario. As such, wages have been absolutely flat.

The rural India is in deep distress. Corporate had also built on relatively limited consumer base. Sooner or later, the time comes that it starts hitting satiation. People have cars that they want, they don’t want to buy any more until next couple of years. What people forget is that the crash that is happening in the auto sector is based on earlier years of high growth that the sector saw. Earlier, the largest-selling cars were entry-level cars. It has not been the case for the past two years. It is clearly not the people coming into the middle class who are buying, but the people who are already there. 

Usually, election spending provides boost to demand, but this did not happen this time. What could be the reasons?

I had expected there would be some impact of that, but apparent there was not much. It may have come on the non-corporate sector side. 

How long will it take to turn around the economy?

That depends. I don’t think that non-corporate sector has reached the stage that they are making a big impact on employment. I think this is going to last for at least two-three quarters. 

Do you think the recent measures will boost consumption, investments, and revive the economy?

The economy is facing problems on the demand side. All the measures that have been taken by the government are on the supply side. Problem is not on the supply side. See, for example, bank recapitalisation. You have the SBI chairman (Rajnish Kumar) saying that he has Rs 1 trillion to be disbursed and there are no takers. The rural India is in deep distress. Corporate (houses) had built on relatively limited consumer base.

GDP at current prices grew only 8 per cent in Q1, while the Budget assumption was 12 per cent for the entire year. If the nominal GDP growth rate falls below the BE, do you think it would affect Budget numbers on revenue collections, fiscal deficit? 

Yes, to an extent. I don’t think income-tax collections would be affected that much, but certainly GST will be. Income tax would not be affected because middle and upper-middle classes are doing okay. Maintaining fiscal deficit at the targeted proportion of GDP will become more difficult if nominal GDP growth shrinks.

What is your projection for real GDP growth for the entire FY20?

I imagine around 5.5 per cent.

In this scenario, how feasible is the target of making India a $5 trillion economy in the next five years?

The economy needs to grow by 12 per cent at current prices in dollar terms. This means 12 per cent in the rupee terms, assuming the rupee does not depreciate. At the moment, it is 8 per cent. My expectation is it will hang around 8-9 per cent for the entire year or may be go up to 10 per cent. In the meantime, the rupee has started depreciating. So, that is going to make it even tougher. So, if the economy grows by 10 per cent in rupee terms, it would be 9 per cent in dollar terms. For the remaining four years, your target goes up to 12.5 per cent a year in dollar terms.