With GDP growth at 4.8%, Chidambaram is finally speaking the truth


Abraham Lincoln once said “You can fool some of the people all of the taaime, and all of the people some of the time, but you can’t fool all of the people all of the time.” The finance minister P Chidambaram finally admitted the truth yesterday. “Consumer inflation in India is entrenched due to high food and fuel prices and monetary policy has little impact in curbing these prices…There are no quick fixes for inflation, will take some time to fix it,” he said.
“Demand is being stoked by the fact that we have high fiscal deficit and that fiscal deficit was not contained for a fairly long period, I think over a period of two years,”
 Chidambaram added.
What Chidambaram meant was that the government over the last few years has spent much more than it has earned, and has been running huge fiscal deficits. This money has not gone into creating physical infrastructure but largely been given away in the form of various subsidies and so called social programmes of the government.
This spending led to an increase in private consumption, which led to inflation, with too much money chasing the same amount of goods and services. And now the inflation is so well entrenched that it refuses to go. In October 2013, the consumer price inflation stood at 10.09% in comparison to 9.84% in September, 201.
One of the things that inflation does is it kills economic growth. And this is very much visible in the second quarter gross domestic product (GDP) growth number that was announced yesterday. For the period between July and September 2013, GDP growth, which is a measure of economic growth, stood at 4.8%, in comparison to the same period last year.
It was slightly better than the 4.4% GDP growth seen during the first quarter of the year i.e. the period between April and June, 2013. This was the fourth consecutive quarter in which the GDP growth has been below 5%. During the same period last year, the GDP growth had been at 5.2%.
The overall GDP growth was helped by a very good growth in agriculture (actually agriculture, forestry and fishing), which came in at 4.6%. This was much better in comparison to 2.7% growth between April and June 2013 and 1.7% growth between July and September 2012. The primary reason for a robust growth in agriculture has been the good rainfall that the country received during this monsoon season.
As Ashok Gulati, Shweta Saini and Surbhi Jain write in a discussion paper titled 
Monsoon 2013: Estimating the Impact on Agriculture released in October 2013 “Of the 4 broad regions of India: the north‐east, the northwest, the central, and the south peninsular India, as categorized by Indian Meteorological Department (IMD), with the exception of north‐east India, all the other three regions received normal or above normal showers.”
This has led to a robust growth in agriculture. As Gulati, Saini and Jain point out “All this is a very good news for a country’s agriculture, where 53% of the gross cropped area is still rain‐fed, and monsoons alone account for more than 76% of the total annual rains. No wonder then that years of good rains are associated with robust agriculture GDP growth.”
A robust growth in agriculture doesn’t help beyond a point because it forms only around 10.8% of the overall GDP (at factor cost at 2004-2005 prices). Manufacturing which is around 14.8% of the total GDP(at factor cost), grew by just 1%. Even though its better than 0.1% growth seen between June and September 2012, 1% growth clearly isn’t enough.

Trade, hotels, transport and communication, which form nearly 28.1% of GDP at factor cost, grew by 4%. But the growth had been at 6.8% between July and September, last year. Community, social and personal services which form around 14.3% of GDP (at factor cost) grew by 4.2% compared to last year. This was half the growth of 8.4% seen during the period between July and September 2013.
All these factors contributed to a sub 5% GDP growth. High inflation remains a major reason for the same. Lets try and understand how. GDP can be measured in different ways. One way is to measure it from the point of view of various industries and agriculture i.e. factors of production. This is referred to as GDP at factor cost, and this is the measure I used earlier in the piece. So we saw that the GDP growth when measured from this point of view was at 4.8%.
Industries depend on demand from people. When people spend money, it translates into demand for industries, and this in turn leads to GDP growth. But there are situations when people can’t spend as much money as they had been doing in the past. One of the reasons is high inflation where prices of goods go up, leading to people cutting down on what they think is unnecessary expenditure.
This is reflected in the private final consumption expenditure(PFCE) number which is a part of the GDP number measured from the expenditure point of view. The PFCE for the period between July and September 2013 grew by just 2.2%(at 2004-2005 prices) from last year. Between July and September 2012 it had grown by 3.5%. The PFCE currently forms around 59.8% of the GDP when measured from the expenditure side.
Hence, if it grows by just 2.2%, it slows down the overall GDP growth. This is because a slowdown in consumer demand means less business for industries and this impacts GDP growth. This is how inflation kills economic growth.
So the question is where will GDP growth go from here? Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, 
is as usual optimistic and he expects the GDP growth rate “in the second half of the current year to be better than the first half.” But that’s what Ahluwalia has been doing for the last few years, forever trying to tell us that the next quarter, the next six months and the next few years are going to be better. He has become a seller of the great Indian hope trick.
Chidambaram was a little more realistic and he felt that the GDP growth will be close to 6% in the next financial year (i.e. between April 1, 2014 and March 31, 2015)and 8% by 2016-2017(i.e. between April 1, 2016 and March 31, 2017). “India will get back to the high growth path,” he said.
But inflation remains the main bottleneck if India has to go back to what Chidambaram calls the high growth path. The only way for controlling inflation is to cut down on government expenditure and the fiscal deficit. And that is easier said than done. In fact, as per data released by the Controller General of Accounts yesterday, the government has already reached 84.4% of the annual fiscal deficit target during the first seven months of the year i.e. the period between April and October 2013.
To conclude, India needs to grow at a much faster rate if there has to be any hope of getting many more people out of poverty. Ruchir Sharma, author of 
Breakout Nations and the head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management, explained the situation best in something that he said at a  literary festival in Mumbai late last year. As Sharma put it “People tell me that if India grows at 5% what is the big deal because that is still faster than the US or many of the European countries. And my response to it is that is the wrong way of looking at it because if India grows at 5% per year, India’s per capita income is really low and it is far too low to satisfy India’s potential and for India to get people out of poverty. And which is why India’s case of a 5% growth rate is a big disappointment.”
And now we are not growing at even below 5%.

The article originally appeared on www.firstpost.com on November 30, 2013
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 



About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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