T N Ninan: A Modi index?

One way to do a reality check on the official numbers will be to develop a desi version of what came to be called the Li index in China

As the Budget season draws up on us, what is the real state of the economy? The official GDP numbers should give cause for satisfaction, since they point to a second year of growth exceeding seven per cent, despite successive droughts. But there is no shortage of people who feel and sometimes argue that the underlying reality is not what the numbers say. The “feel good” factor could be missing because asset prices are low — share prices are back to where they were a couple of years ago, and real estate prices are if anything lower. Also missing is the money illusion that comes with inflation: real income – for companies and individuals – may be growing at seven per cent, but with inflation of a similar rate, the nominal income growth becomes 14 per cent. At that rate, companies could virtually double their turnover in five years. However, with wholesale price inflation being negative, the money illusion is missing and nominal incomes more or less reflect real growth. Perception now matches reality in a disconcerting way. If anything, the commodity price deflation results in eye-grabbing headlines about steel, aluminium other commodity product companies losing money or wiping out profits.

One way to tackle the perception issue would be to develop a desi version of what came to be called the Li Keqiang index in China — after that country’s prime minister-to-be said that he tracked credit growth, freight movement and electricity consumption to figure out the real state of the economy. If you look at those parameters, credit growth has been slow, having dipped to single-digit growth, but more recently has picked up to about 11 per cent — which is comfortably more than the rate of nominal GDP growth. However, the bulk of the increased credit is in consumer lending — which reflects consumer confidence. Corporate loans are said to be growing at barely five per cent — which is not a good sign. As for electricity consumption, growth in 2014-15 was a healthy 8.4 per cent, but has dipped to 4.4 per cent in the first eight months of 2015-16 (the medium-term average rate of growth here is about 5.5 per cent). And freight movement has certainly been slow — both on rail and by road.

To these, one could add some other system-wide indicators — like foreign trade numbers (which are negative), tax collections (apparently short of budget), corporate profits (which as a share of GDP seem to show no improvement, being about 40 per cent below the peak pre-2008 level) and the various survey results on business confidence (which have lately shown an uptick). Somewhat less reliable as an indicator are the figures on investment intentions since there is a gap between such intentions and activity on the ground — a gap that holds for highway project clearances too. When one puts all of this together, it would seem that the economy is certainly not in top gear, and may be at only canter speed. Does that translate into seven per cent-plus growth? It is possible, if you accept the finance minister’s position that the economy is capable of eight to nine per cent growth.

So what does a desi version of the Li index tell us? The conclusion would have to be that we are treading water, not swimming forward in the direction and at the speed needed. Perhaps the key operating issue is the simple fact that structural reforms (such as on taxation) are either absent or blocked in Parliament. Factor markets for land, labour and capital remain broadly unchanged. So what the finance minister can and should do is first admit that the state of the world economy remains weak and volatile, underline the need for macro-economic stability in such an environment, and therefore say that only structural reform will continue to deliver progress in over-all productivity.