Isn’t Indian Economy in Recession?

Since the time of the second wave of reforms in 1990s and its embedded neoliberal policies1, the economic gain of capitalist class has been enormous. During this period the Indian capitalists multiplied their fortunes many fold2 (Das 2013; Patnaik 2010a). As a token of this the growth trajectories of Indian economy climbed to break the “Hindu” rate of growth of 3.5% per annum (Kumar 2009). This gradual climbing of growth has misled even many of the left intellectuals and sold the story of “ceasing of the capitalist crisis”. However, the bursting of the housing bubble and a crisis henceforth has put a full stop to the illusion of capitalist economists and its servants across the globe. Despite this, the Indian capitalist economists kept their campaign alive by arguing that the Indian economy is resilient to the world economic crisis3. This note is a moderate attempt to understand the growth trajectories of various sectors to examine whether the campaign is true as far as the economic growth is concerned in India. The empirical observation we made stands in sharp contrast to the campaign to protect the interests of capital.

GDP and Sector-Wise Growth in the Post 2008 Crisis

In India, the gross domestic product at factor cost was growing at an impressive seven plus rate prior to the financial crisis in 2008, which is otherwise called ‘the housing bubble burst’ in United States. Since housing and other financial services constitutes a key position in the service sector, the service sector dependent economies received an immediate shock due to the burst (Aryeetey & Ackah 2011; Hoen 2011; Gore 2010; Ocampo 2009; Bamakhramah 2009; Patnaik 2009; Patnaik 2008a). Slowly other sectors too came under the grip of recession. The same scenario can be seen in Indian economy, but the reflection and sequence of events seems different. Graph 1 shows that the reflection of the crisis immediately affected all three sectors, agriculture industry and services mercilessly. The industrial sector and agriculture showed a direct dip in the second, third and fourth quarter of 2008-09 and the first quarter in 2009-10, whereas the services sector showed some gain during the first, second and third quarter but fell in the fourth and the following financial year. The strength of the crisis resulted in a dip in GDP growth from 7.3% in the first quarter of 2008-09 to 5.8% in the fourth quarter of the same financial year. This was contrary to the continuous and fictitious propaganda of capitalism that Indian economy is resilient to shocks and endemic crisis.

After a constant debate between the heterodox economists such as Prabhath Patnaik (Patnaik 2008a; Patnaik 2008b; Patnaik 2009), Arjun Sengupta (Sengupta 2008) C.P. Chandrashekhar (Chandrasekhar 2008a; Chandrasekhar 2008b; Chandrasekhar 2009b; Chandrasekhar 2009a; Chandrasekhar 2010; Chandrasekhar 2011) and the cohort of neoclassical economists, finally, the government and the RBI put up a stimulus package4. This intervention gave a boost to the economy and resulted in a GDP growth of 9.4% in the fourth quarter of 2009-10. This shows an interesting point as claimed by the Keynesian stimulus package. It had a direct effect in different sectors such as the agricultural and industry. This contributed to a gradual revival of the economy despite the fact that the service sector growth kept declining during this period.

The strength of the crisis resulted in a dip in GDP growth from 7.3% in the first quarter of 2008-09 to 5.8% in the fourth quarter of the same financial year. This was contrary to the continuous and fictitious propaganda of capitalism that Indian economy is resilient to shocks and endemic crisis.

This decline of service sector growth can be read as the effect of the global economic crisis where the service sector across the world showed an initial slump. Apart from that, the Government of India was too quick to withdraw the stimulus package, which turned the economy and its growth towards a downward swing. This downswing may be due to the contraction of global demand. Otherwise, it is difficult to understand the shrinking of industrial growth from the first quarter of 2010-11 and followed by a fall in agricultural growth (from the third quarter of 2010-11). In a nutshell the overall economy started a recessionary trend from the first quarter of 2011-12. The claim of the recessionary trend here strengthens with the fact that in the last six quarters, the growth of GDP at factor costs exhibits a continuous dip. Conceptually, such gradual sliding of growth rate could fit in the recessionary move of the economy. This in reality gives no glossy picture of growth, but a pure metrics of advancing to an acute recession and perhaps a pointer to a grave depression. The finance ministry’s monthly and quarterly report indicates that the GDP at factor cost touched an all time low of 5.3% in the second quarter of 2012-13 since 2008, which shows that “depression” is not a myth.

xdfdfd
Source: CSO, and Monthly Economic Report of Ministry of Finance

A detailed discussion on the sector wise analysis perhaps gives more clarity on this. The performance of key sectors like industry and services requires an attentive analysis in this regard because the priority of neoliberal economic policy and the rhetoric of capital revolve around the growth figures of these sectors.

Growth of Industry in the Post Financial Crisis of 2008

The industrial growth is rife with the changes in business cycle. The growth of industrial sector fell sharply during and post crisis period. The intensity of this decline can be gauged from the dip of growth rate from 5.4% in the first quarter of 2008-09 to 1.6% in the third quarter of 2008-09. As we noted above, the stimulus slowly brought the growth of production back and took to the high growth of 12.4% in the fourth quarter of 2009-10, which was quite impressive. However, the second wave of decline started henceforth and by the fourth quarter of 2011-12 it reached another minimum of 1.9% growth. The intensity of constituent industries in the industrial sector hence begs some illustration.

Graph 2 shows that mining and quarrying are the most vulnerable industries. As an immediate effect of the crisis, the growth of mining and quarrying declined and reached a negative growth by fourth quarter of 2008-09. During the four quarters in 2008-09, the other industries like manufacturing and construction too declined nearly to one percent. Interestingly electricity, gas and water supply showed a steady growth over the period of the first wave of the crisis. An explanation of this could be that the ratchet effect of consumerism has not necessarily resulted in reduction in the household consumption of electricity, gas and water supply. Due to the hypothetical ratchet effect, we can argue that the crisis of this sector always show a lag compared to other sectors.

xdfdfd
Source: CSO, and Monthly Economic Report of Ministry of Finance

Even after the stimulus and other aid to the industrial sector, the growth of various industries started declining very sharply from the fourth quarter of 2009-10. i.e, the period 2010 showed a second wave of recession. During this period a decline was registered in all industries including electricity, gas and water supply, which were resilient during the 2008 crisis. The effect and depth of the second crisis shows a continuous decline in manufacturing, mining and quarrying industries since the first quarters of 2010-11 and reached negative territory. Despite the efforts to revive growth of these two industries, achievement of growth in other industries shows no radical change. That is, the positive growth in construction, and electricity, gas and water supply industries alone cannot exhibit a revival in the industrial sector. The reason for this could be that the proportion of these industries are smaller than the proportion of mining, quarrying and manufacturing in the total industrial production, which makes us skeptical that there is no sign of resurgence in the immediate future. Hence the crisis in the industrial sector is far from over.

Growth of Services Sector in the Post 2008 Crisis

With a quarterly fluctuating growth, the services sector shows a gradual decline in growth rate since the crisis in 2008. The extent of this can be observed through various constituent services industries. Out of the total services in the sector, only the financial services show a consistent growth. All the other services show a trend of decline in the rate of growth over the last eighteen quarters. For instance the community and social services indicates a sharp boost in growth due to the stimulus, but started declining from the second quarter of 2009-10 and reached negative in the third quarter of 2010-11 (See Graph 3). Even with the boost in the beginning of 2011, the performance of community and social services fell sharply ever since the crisis. Similarly, the fall of growth in the trade, hotel, transport and communication services were more rampant than other services. For instance, as an immediate response to the global financial crisis in 2008 the growth of this service declined from more than 10% to 3.7%. As we discussed, the effect of stimulus made a slow push to the growth of the sector but it continued to fall from the fourth quarter of 2009-10 with an exception of the first quarter of 2011-12. The overall decline in services sector reveals that there is a tightening knot of recession on in India since 2010, which is graver than 2008. This leads us to conclude that the crisis in India is far from over. On the contrary it is sinking to a state of acute recession.

xdfdfd
Source: CSO, and Monthly Economic Report of Ministry of Finance

The current policy of Reserve Bank of India and the pressure from finance ministry to reduce the repo and CRR implicitly and explicitly shows an attempt to pull the economy from slipping into acute recession. Many report that the current growth path of both the industry & services shows no hope of an immediate takeoff of growth (Mishra 2013; Kala 2013). On the contrary the skepticism of sliding to acute recession is very much in sight. In this context the monetary policy of RBI needs more attentive analysis, because how effective these policies are when the economy demands a fiscal stimulus demands a test of time. Our apprehension is that how long will the government wait before giving another stimulus, when the economy is really in need and is undergoing continuous decline in the GDP growth.

References

Aryeetey, E. & Ackah, C., 2011. The Global Financial Crisis and African Economies: Impact and Transmission Channels. African Development Review, 23(4), pp.407–420. Available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8268.2011.00295.x/abst... [Accessed February 14, 2013].

Bamakhramah, A., 2009. The Origin of Financial Crisis: Central Banks, Credit Bubbles and the Efficient Market Fallacy. Journal of King Abdulaziz University-Islamic Economics, 22(2), pp.269–273. Available at: http://prod.kau.edu.sa/centers/spc/jkau/Data2/Review_Artical.aspx?No=3025 [Accessed December 28, 2011].

Business Maps of India, Dhirubhai Ambani Biography, Dhirubhai Ambani Business Profile. Available at: http://business.mapsofindia.com/business-leaders/dhirubhai-ambani.html [Accessed February 14, 2013].

Chandrasekhar, C.P., 2011. Debt as Bargain Counter. Economic and Political Weekly. Available at: http://www.epw.in/h-t-parkh-finance-column/debt-bargain-counter.html [Accessed February 23, 2012].

Chandrasekhar, C.P., 2010. Global Imbalances and the Dollar’s Future. Economic and Political Weekly. Available at: http://www.epw.in/special-articles/global-imbalances-and-dollars-future.... [Accessed March 14, 2012].

Chandrasekhar, C.P., 2008a. India’s Sub-Prime Fears. Economic and Political Weekly, 43(32), pp.8–9. Available at: http://www.jstor.org/stable/40277815 [Accessed April 11, 2012].

Chandrasekhar, C.P., 2009a. Must Banks Be Publicly Owned? Economic and Political Weekly. Available at: http://www.epw.in/global-economic-and-financial-crisis/must-banks-be-pub... [Accessed July 14, 2011].

Chandrasekhar, C.P., 2009b. Sovereign Default in the Core? Economic and Political Weekly. Available at: http://www.epw.in/h-t-parkh-finance-column/sovereign-default-core.html [Accessed February 14, 2013].

Chandrasekhar, C.P., 2008b. The Problem as Solution. Economic and Political Weekly, 43(42), pp.29–31. Available at: http://www.jstor.org/stable/40278073 [Accessed April 11, 2012].

Das, R.J., 2013. The dirty picture of neoliberalism: India’s new economic policy. View Point. Available at: http://www.viewpointonline.net/the-dirty-picture-of-neoliberalism-indias... [Accessed February 14, 2013].

Dasgupta, A., 2008. Government unveils stimulus package. The Hindu. Available at: http://www.thehindu.com/todays-paper/government-unveils-stimulus-package... [Accessed February 14, 2013].

DNA, 2008. Highlights of India’s fiscal stimulus package. DNA. Available at: http://www.dnaindia.com/money/report_highlights-of-india-s-fiscal-stimul... [Accessed February 14, 2013].

Gore, C., 2010. The global recession of 2009 in a long-term development perspective. Journal of International Development, 22(6), pp.714–738. Available at: http://onlinelibrary.wiley.com/doi/10.1002/jid.1725/abstract [Accessed February 7, 2013].

Hoen, H.W., 2011. Crisis in Eastern Europe: The Downside of a Market Economy Revealed? European Review, 19(01), pp.31–41.

Indian Express, 2009. Govt unveils second stimulus package - Indian Express. Indian Express. Available at: http://www.indianexpress.com/news/govt-unveils-second-stimulus-package/4... [Accessed February 14, 2013].

Kala, A.V., 2013. India Industrial Output Shrinks Again. Wall Street Journal. Available at: http://online.wsj.com/article/SB1000142412788732488050457829913091106601... [Accessed February 14, 2013].

Khare, H., 2008. PM, Ahluwalia sanguine about economy. The Hindu. Available at: http://www.thehindu.com/todays-paper/pm-ahluwalia-sanguine-about-economy... [Accessed February 14, 2013].

Kumar, A., 2009. Tackling the Current Global Economic and Financial Crisis: Beyond Demand Management. Economic and Political Weekly, 44(13), pp.151, 153–157. Available at: http://www.jstor.org/stable/40278674 [Accessed February 8, 2013].

McDonald, H., 1998. The Polyester Prince: The Rise of Dhirubhai Ambani, Allen & Unwin.

Mishra, A.R., 2013. India’s economic growth seen at 5%: Is the worst over? http://www.livemint.com/. Available at: http://www.livemint.com/Politics/DwQWAvzYY1BIhJVnKXyePI/Govt-pegs-GDP-gr... [Accessed February 14, 2013].

Narayanan, K.S., 2009. India announces third stimulus package. One world South Asia. Available at: http://southasia.oneworld.net/news/india-announces-third-stimulus-packag... [Accessed February 14, 2013].

Ninan, O.A., 2008. RBI unveils further measures to boost credit flow. The Hindu. Available at: http://www.thehindu.com/todays-paper/tp-business/rbi-unveils-further-mea... [Accessed February 14, 2013].

Ocampo, J.A., 2009. Latin America and the global financial crisis. Cambridge Journal of Economics, 33(4), pp.703–724. Available at: http://cje.oxfordjournals.org/content/33/4/703 [Accessed April 24, 2012].

Patnaik, P., 2010a. A Left Approach to Development. Economic and Political Weekly. Available at: http://www.epw.in/perspectives/left-approach-development.html [Accessed February 14, 2013].

Patnaik, P., 2008a. Dr. Prabhat Patnaik on The Global Economic Crisis, Asian School of Business, Chennai. Available at: http://archive.org/details/BadriSeshadriDr.PrabhatPatnaikonTheGlobalEcon... [Accessed February 4, 2013].

Patnaik, P., 2009. Prabhat Patnaik on Global Economic Situation | NewsClick. Newsclick. Available at: http://newsclick.in/international/prabhat-patnaik-global-economic-situation [Accessed February 10, 2013].

Patnaik, P., 2008b. The Present Crisis and the Wy Forward. UN. Available at: http://www.un.org/ga/president/63/interactive/gfc/patnaik_p.pdf [Accessed February 14, 2013].

Patnaik, P., 2010b. The State Under Neo-liberalism. Monthly Review zine. Available at: http://mrzine.monthlyreview.org/2010/patnaik100810p.html [Accessed November 6, 2012].

Sengupta, A.K., 2008. The financial crisis and the Indian response. The Hindu. Available at: http://www.thehindu.com/todays-paper/tp-opinion/the-financial-crisis-and... [Accessed February 10, 2013].

Special Correspondent, 2008a. Economists call for deep reforms of global financial system. The Hindu. Available at: http://www.thehindu.com/todays-paper/tp-business/economists-call-for-dee... [Accessed February 14, 2013].

Special Correspondent, 2009. “Indian economy will recover in 2010-11”. The Hindu. Available at: http://www.thehindu.com/todays-paper/tp-national/tp-karnataka/indian-eco... [Accessed February 14, 2013].

Special Correspondent, 2008b. No cause for alarm: Chidambaram. The Hindu. Available at: http://www.thehindu.com/todays-paper/no-cause-for-alarm-chidambaram/arti... [Accessed February 14, 2013].

Special Correspondent, 2008c. “None can steer economy better than Manmohan”. The Hindu. Available at: http://www.thehindu.com/todays-paper/none-can-steer-economy-better-than-... [Accessed February 14, 2013].

Srivastava, M., N & Lakshman, ini, 2008. India’s Stimulus Package: More Help Needed. BusinessWeek: global_economics. Available at: http://www.businessweek.com/stories/2008-12-09/indias-stimulus-package-m... [Accessed February 14, 2013].

Staff Reporter, 2008. “Left struggle insulated economy from global crisis”. The Hindu. Available at: http://www.thehindu.com/todays-paper/tp-national/left-struggle-insulated... [Accessed February 14, 2013].

The Economic Times, 2010. Mukesh Ambani to be richest man in world in 2014: Forbes. The Economic Times. Available at: http://articles.economictimes.indiatimes.com/2010-09-12/news/27597549_1_... [Accessed February 12, 2013].

The Hindu, 2008a. Meaningful fiscal stimulus. The Hindu. Available at: http://www.thehindu.com/todays-paper/tp-opinion/meaningful-fiscal-stimul... [Accessed February 14, 2013].

The Hindu, 2008b. RBI cuts rates, assures more steps. The Hindu. Available at: http://www.thehindu.com/todays-paper/rbi-cuts-rates-assures-more-steps/a... [Accessed February 14, 2013].

Vadlamani, S., 2008. Finally, India gets its fiscal stimulus package. Jetpack by WordPress.com. Available at: http://jetpack.wordpress.com/jetpack-comment/ [Accessed February 14, 2013].

Notes