India's high growth story is turning out to be a lot of hot air and fast unraveling. Companies shutting shop have increased. That is showing up in the rising non-performing assets (NPA) within the banking system.
Delinquent loans, where interest and principal are overdue, with the banks are presently 4 per cent of the gross loan book or Rs 2.5 trillion. On the face of it, the NPA's are just about 3 per cent of India's gross domestic product and is far lower than those in Europe or in the United States providing a sense of comfort.
However, there are another set of numbers that convey worry. Those numbers include companies seeking debt restructuring or forbearance on interest and principal repayments. If that number of Rs 2.3 trillion is also included, then NPA ratio is 6 per cent of the GDP. Then there are corporate guarantee delinquencies. If those numbers are also included, then the NPAs could be higher at 8 per cent or humongous Rs 8.5 trillion, an indication that some of the bank loans are actually to ghost entities. At current dollar that would be $177 billion. It could be higher since some infrastructure companies, especially roads, power and ports that are functioning on deferred funding arrangements (Build, Operate and Transfer) are yet to begin debt repayments are yet to begin with moratoriums in place.
When India was growing at 3 and 4 per cent in the 70s and 80s, gross non-performing assets were just 2 per cent of the GDP. At higher growth rates, NPAs also appear to have increased not just in absolute terms as well. Are high insolvency rates a sign of economic progress?
But here is another reality byte! That India's high growth is fiction is apparent when the GNP (Gross National Product) based measure is used. The GNP measure uses net factor income (NFIA) -- income earned by Indian residents on foreign shores. In 2012-13, the GDP growth at factor costs was 5 per cent and 6.2 per cent in 2011-12. GNP growth was 2.8 per cent and 5 per cent for the same period.
The high GDP growth therefore was powered largely by a yawning current account deficit (implying NFIA is negative) that is presently a record high 5 per cent of the GDP. The last time India went to the IMF and pledged gold in 1991, was when the current account deficit was 2.5 per cent of the GDP. The high current account deficit means that the economy is consuming more than it is producing. Indian government economists (spin doctors?) call it "absorption." That "absorption" is driven domestic consumption, investment and government spending. The latter two are not happening. It is only consumption-- energy consumption particularly diesel and coal. The energy is consumed is for powering large cars and air conditioners and other luxury goods in urban areas, therefore is obvious the "absorption" is akin to pouring alcohol down an alcoholic's throat!
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| Where is the growth? |
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| Only for a few? |
Despite the feverish sales pitch and the neo-liberalism of the country's economists, India is back to the 3 per cent growth of the 70s and comes with an added set of problems, almost similar to Latin America in the early 80s! Energy import bills have mounted and ability to meet the payments have deteriorated manifesting in currency market volatility.
Ideally the high growth should have showed up in rising government incomes. After all that was the promise made by India's economist prime minister, Manmohan Singh in 2004. Instead India's tax to GDP ratio has actually dropped, despite the reforms.
It is really strange that a country that boasting of such growth rates has not been able to improve tax collections or compliance. The post reform tax to GDP ratios are just about as good as sub-Saharan Africa. The tax to GDP ratio of India is 8 per cent and has stagnated there since 2004. The tax to GDP ratios were close to 11 per cent during periods when the country was in the so called "Hindu Rate of growth" of 3 per cent during the 70s, and early 80s.
Yet, the weak ratio is not identified as the reason for the fiscal deficits. India's fiscal deficit in 2012-13 was 5.2 per cent of the GDP or Rs 5.21 trillion. When compared with the rest of the world, it is hardly a large figure especially since fiscal deficits are above 8 per cent in most of Europe and in the U S. Unlike in Europe and the U S, however, India has failed to raise tax resources. Raising the tax to GDP ratio to 12 per cent per cent would mean that India would end up with a fiscal surplus.
Such a move though would mean recovering dues from corporate entities like Reliance Industries and a series of companies that have perfected the art of dodging taxes and high powered filibustering of tax recovery. Is low tax compliance a sign of economic progress or is it capitulation to industrial state where corporate autocracy prevails over public interest?
The capitulation in turn implies that fiscal problems are identified as expenditure related and therefore identified for sequestering. The cuts in expenditure have resulted in crumbling social infrastructure and public services, including national security. The result, India has among the worst public services in the world despite all the tall claims of high growth. Female literacy is lower than in Uganda.
Worse, the low tax compliance resulting from capitulating to the powerful corporatocracy means that the state has little funds to meet its own expenditure, let alone make capital investments and generate employment. That has prompted privatization of state owned sectors, a move that could include public services, including water supply.
But has the private sector delivered? So far they haven't. They certainly haven't in both the electricity and roads. They are unlikely to do so in public goods and services services, since the objectives of the state and private investors are completely different. A welfare state's objective is an economic rate of return on investment. For the Indian private sector, the objective is almost exclusively quick financial returns. That means the private corporate sector's motive is profits and not societal or national progress. For finance capital objectives are defined by dividends and earnings per share – the faster and higher the returns the better it is.
Up to the 10th plan period, India's focus on the Economic Rate of Return which meant a focus on development and progress. But few in government now mention economic rates of returns. They appear to have completely forgotten the term.. The, focus shift is on the stock markets.That also explains the national media's redirection of attention from national economic issues to corporate results and stock market performance, as if the latter was the beginning and end of economic civilization.
But corporate profits are not necessarily attained by high employment generation. Employment is more an afterthought.
Take the case of India's. Infosys that has begun to pink slip employees. The reason is a loosely used and undefined term "under performance." Infosys official justification came in January this year that said, "This (reducing workforce) is done regularly and is not a one-time event. We have a robust performance management system that includes structured appraisals and performance feedback."
The real reason is obviously is to squeeze wages to less than subsistence and reduce workforce to servility, not very dissimilar to bonded labour of the pre-independence times. After all supremacy is for stock holder returns even if it means a regression to sweat shops! The sad truth is that sweat shops are no guarantors of high economic growth. Low wages and mounting cost of living are a ticking time bomb!
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