Goldman Sachs thinks that India's GDP growth rate will be to the tune of 7.9% in the next financial year, despite adverse global conditions. It has identified domestic consumption and capital investment by the government as the key drivers of growth. Even as Goldman Sachs released its forecast, the Ministry of Finance released data that says indirect tax collections increased by a very healthy 24% during April-November, 2015. Normally, indirect tax collections are a reflection on the health or otherwise of economic activity in the country. Simultaneously, Union Commerce Minister Nirmala Sitharaman informed the Parliament that foreign direct investment inflows had jumped 24% to $ 60 billion during the tenure of the present government.
All these bits and pieces of seemingly random information seem to confirm what many thought a few weeks ago when GDP growth figures for the first six months of the current fiscal were released. The Indian economy grew 7.4% in the first half of 2015-16; with the manufacturing sector registering a very healthy growth rate of about 9.3%. Then again, some economists are convinced that the implementation of the Seventh Pay Commission hikes will lead to a kind of consumption upsurge that was witnessed in 2008-9 when the Sixth Pay Commission hikes were implemented.
So is India well and truly back on the high growth path? Nobody seems to dispute the fact that India has replaced China as the fastest growing economy in the world. But two troubling questions persist. First, is the economy really growing as fast as the "numbers" suggest? Second, even if it is growing as claimed, does it have the capacity to deliver more than 10 million new jobs (or livelihood opportunities) every year? Let's look at the first question. If one looks at the growth in indirect tax collections, it would be tempting to conclude that economic activity is once again booking. But look deeper and one finds that almost all the growth in tax collections is thanks to increased excise duty on petroleum products, a green chess in them and the hike in service tax rate from 12% to 14%. The increase simply doesn't reflect a sustained rise in economic activity.
One set of numbers for November, in fact, shows that the growth momentum is still very fragile. Customs duty collections went up by less than 2% in November, 2015. In fact, merchandise trade figures for India present a very sorry picture. For eleven consecutive months, exports have declined. In common sense economics, exports minus imports is added on to GDP. If exports show a huge decline of about 20% over an extended period, what does that say about GDP growth rates? Commercial vehicle sales are another reliable indicator of economic activity. In 2011-12, the last year the Indian economy boomed before it tanked subsequently, commercial vehicle sales were to the tune of about 8,10,000 units. In 2014-15, the figure was 615,000. And figures for the first half of the year suggest that demand for commercial vehicles is still very weak. Yet another indicator is construction and related industries. The numbers here too are dismal. Construction grew at a meager below 3% in the first half of the current year; the cement industry grew at a humble 1.9% in October 2015. Then there is real estate. Data for this sector is dodgy, but talk to any builder and you will hear desperate stories of unsold inventory. Clearly, doubts about the reality of higher growth rates are bound to persist. Most economists who predict a Pay Commission driven consumption boom seem to miss one fact. In 2008, government employees got a bonanza of almost 30 months salary hike as arrears. This time around, there will be no such luck. What about capital investment by the government. There is no doubt that ambitious initiatives like Make in India, Digital India and Smart Cities will trigger a big jump in investment. But any student of economics knows that there is a time lag of about three years before the positive impact of new investments is reflected in GDP numbers.
What about the second troubling question related to new jobs? Except in isolated pockets, nothing that the government has done so far suggests a sustained and sustainable growth in job opportunities. A few months ago, the Uttar Pradesh government issued ads to fill up 328 posts of peons. More than 23 lakh people, many of them Ph.Ds, MBAs and engineering graduates, applied. Similarly, in Chattisgarh, more than 70,000 candidates lined up to compete for 30 posts of peons. That shows the extent of the challenge confronting India when it comes to job creation.
