Wednesday, March 06, 2019

Can increasing debt be counted as GDP growth?

India's economy, as measured by its gross domestic product (GDP), grew by 6.6% in the third quarter of this financial year, ending 31 December. Corrected GDP growth was 8% in the first quarter and 7% in the second. The World Bank predicted a growth of 7.3% this fiscal, rising to 7.5% in the next two financial years. "India's growth outlook is still robust, India is still the fastest growing major economy," said A Kose. "The fact is that Indian economy is being able to deliver growth slightly above its potential is a very good sign." While growth in agriculture has plummeted, the private sector in manufacturing and services grew much faster, wrote N Rajadhyaksha. "The bottom line: The rest of the private sector grew nearly six times faster than agriculture in nominal terms in the third quarter." Although growing faster than agriculture, manufacturing and services are not growing as fast as before, a key factor cited by the Reserve Bank (RBI) when cutting its policy rate by 25 basis points last month. Out of 16 indicators of the economy, only 4 were growing, while 8 were in the red. The good news is that, "Gross fixed capital formation, a key metric for investment demand, expanded by a healthy 10.6%, building on the second quarter's 10.2% increase." Why so much gloom if the economy is to rise by 7.3% for the whole year? Because, unemployment rose to 7.2% in February 2019, despite a falling labor participation rate, having risen to its "highest level 45 years in 2017/18". What is really worrying is that the labor force participation rate, which is "the section of the working population in the age group of 16-64 in the economy currently employed or seeking employment". has dropped to 49.8%. All this growth is possible only because of a rising government expenditure, wrote V Kaul. "The government expenditure for this fiscal is expected to grow to 8.87%, whereas GDP is likely to grow at 6.98%. In 2017-18, government expenditure grew at 14.97%, while GDP grew at 7.17%." Fiscal deficit is already at 121.5% of the full year target, set in the budget, but would have been higher but for the fact that "a lot of the revenue, as well as the capital expenditure of the government, is now kept outside its budget". "This style of pushing up growth by raising government expenditure is not sustainable."  Total government debt has risen to an eye-watering Rs 82 trillion, an increase of 49%, in the 4 years of this government. Why is unemployment rising when the government is spending so much? "Explicit subsidies have grown from 1% of total budget expenditure of the Centre in 2017-18 to more than 12% in 2018-19..." Despite interest rate being cut to 6.25%, 10-year bond yields are at around 7.4% because of the hidden deficit. Is charity counted in GDP growth? If not, we should subtract fiscal deficit from GDP growth rate. That explains why there are no jobs. 

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