Isn’t Indian Economy in Recession?
|Siddik Rabiyath||April 27, 2013|
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.
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.
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.
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.
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.
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Prabhat Patnaik is of the view that any neoliberal State has two primary characters and one secondary character (Patnaik 2010b). The primary character identified as one, State ascribed as superior to society, uses that power “exclusively to promote the interest of finance capital”. Two, being the boundaries of nation States vanishes into a global economy under the surrogacy of US capitalists, the neoliberal state hence “protect and promote it [finance capital] on the global plane where it operates…” Adding to this Patnaik identifies a third characteristic to neoliberal India: “‘texture’ – the bureaucracy, the State personals, and the organic intellectuals”. They categorically add oil into the flame of neoliberal State. ↩
One of the widely cited examples is the Reliance group and its growth during the period (McDonald 1998; The Economic Times 2010; Business Maps of India n.d.). ↩
Many economist and politicians joined a chorus that the condition of Indian economy is not at all at stake (Special Correspondent 2008b; Khare 2008; Special Correspondent 2008c; Special Correspondent 2009). This was done despite all the pleas and opposition made by Left and other heterodox economists and politicians (Patnaik 2008b; Staff Reporter 2008; Special Correspondent 2008a) ↩
Stimulus package is a Keynesian way of overcoming the crisis in the economies. It insists the government to spend more and cut tax rates to stimulate investment and production. After the financial and credit crunch lead global financial crisis, Indian policy makers were slow to adopt a fiscal stimulus, however with the pressure from different grounds, finally the government adopted a three step stimulus package (first on 7th of December, 2008, second on 2nd of January, 2009, third on 24th February, 2009, fourth on 26th February, 2009 (fourth stimulus based on the foreign trade policy))as an initiation to overcome the crisis (The Hindu 2008a; Dasgupta 2008; DNA 2008; Srivastava et al. 2008; Vadlamani 2008; Indian Express 2009; Narayanan 2009). Before the stimulus package RBI initialized steps to curb the extent of crisis by cutting lending rates in November 2008 (Ninan 2008; The Hindu 2008b). ↩
|Essay, recession, India, Neo-liberalism, Economics|
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