Chirag Desai

‘It wasn’t just DeMo’


R Jagannathan, writing for Swarajya:

Well, my advice to both sides is chill. There is no need to garland or shoot the CSO. The higher growth number does not necessarily validate DeMo. At best, we can say that DeMo was a minor disruption compared to the bigger disruptions happening around the world. As for detractors, they will get ample opportunities to pin the slowdown blame on DeMo, since 2016–17 has anyway seen a slowdown in growth relative to the year before.

Ah, but we don’t know how to chill these days, do we? Or wait until we have enough quantifiable data to comment on something as large as demonetization, instead basing it on one statistic, either way, without establishing context.

In other words, the deceleration due to DeMo itself may be marginal, but the broader slowdown relative to the last financial year is sharper.

Another case where macro-context is important when judging what economic statistics reveal. Growth was not at the same levels this year compared to last year in any event, and even without demonetization, an expectation of downturn in overall growth was to be expected. The point is, can we attribute the entire 0.4% drop from the previous quarter to demonetization? Jagannathan postulates, and I agree, that’s a no.

The reality is that in a world of multiple disruptions there can be no normal level of growth for anybody.

In Macroeconomics 101, right up in Chapter 1, one of the earliest lessons was that concurrency of two events does not imply causality. Economics is a complex ‘sport’, convoluted enough to stump even seasoned professionals.

The above data averages show that the basic trajectory of India’s growth was probably in the 5–6 per cent range for a very long time, both pre- and post-reform. The UPA period was an aberration, and high growth was driven by extremely favourable global conditions and by harvesting the fruits of reform sown during the Atal Behari Vajpayee period.

This is good analysis, and telling when viewed through a larger spectrum (going back all the way to 1985). Our growth pattern has roughly stayed within the same bounds.

Regardless of whether you measure GDP the old way or the new, we are still to recover fully from the self-inflicted wounds of the UPA era.


The lessons for the Modi government are this:
One, keep plugging away at ease of doing business and reforming economic administration. Don’t obsess about the GDP growth rate, or celebrate some good numbers too soon.

Agree. Think a good GDP outcome highlights the resilience of the Indian economy — against both global headwinds and internal disruptions, including demonetization. There are positive signals, such as higher private consumption growth, or the auto industry — widely believed to be a large struggler post November — reporting higher domestic sales, and know Government collections are expected to go up via collections from both a wider tax base and the final payment of the Income Declaration Scheme 2016 come September 2017. But global conditions, and internal factors such as job slowdowns will need to be navigated.

Two, big bang and incremental growth are not opposites. When the condition is ripe, go for big bang (GST is one example); when they are not, keep pushing small doses of reform where you can.

No comment on the advice here, except that I think the Government has done this one thing absolutely right since coming to power. There is scope for deeper analysis on whether every reform was successful or not, but the fact that incremental and big bang reforms have been pursued hand in hand since May 2014 will be hard to argue against.

Three, get states into the act. The centre cannot be the driving force of the economy. Reforms must touch states, and they hold the key to faster growth.

Again, some positive moves have already happened, along with the change of revenue sharing, where they’re steadily increasing revenue sharing with states. Obviously, just the funds aren’t enough, and State initiatives that extend Central initiatives where concurrent control exists have to be strengthened and audited.

And four, forget about what is our potential rate of growth. We can only discover that by hindsight. In an unstable world, no growth outcome is likely to mirror our expectations. Economic forecasting is no better than astrology. We must negotiate growth in the fog generated by disruptive forces. This is why we got our DeMo forecasts wrong, for global disruptions are DeMo raised to the power of 10.
But if you still want a number, I would say India’s growth average will be in the 6–7 per cent range in the coming decade.

I agree with just about everything in this post, except for the prediction numbers. My range would be 7–8 per cent, starting FY2019–20; we can expect the trend to be clear by the end of FY2018–19.