Latest GDP numbers appear to have slain the demon of DeMon, but economic fundamentals remain a challenge

Demonetisation - Currency
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From Congress vice-president Rahul Gandhi’s made-for-TV ‘Gabbar Singh Tax’ jibe to Prime Minister Narendra Modi’s retort on the ‘Grand Stupid Thought’ of an 18% cap on GST rates, Modi government’s economic performance has been shaping the prestige poll battle in Gujarat. The stakes are high for both: a resurgent Rahul, campaigning with a newfound overt Hindu-ness and political nimbleness, and the PM digging deep into the reserves of Modi magic in its original karmbhoomi.

For a PM who came to power on a narrative of performance, economics is politics and GDP growth numbers have an added significance, providing perspective on what really is happening to the economy amidst all the political rhetoric. In that sense, GDP numbers released by the Central Statistics Office, showing that the economy grew at 6.3% in July-September 2017, the second quarter of the current fiscal year, is good news politically for BJP in Gujarat.

For the country as a whole, it also shows that the worst of the effects of demonetisation and teething troubles with GST may be behind us. The new numbers are encouraging because they arrest the secular trend of decline from 9.2% growth in Q4 2015-16 to a three-year low of 5.7% in Q1 2017-18. The economy has grown to Rs 31.66 lakh crore, from Rs 29.79 lakh crore at this time last year, driven by growth in manufacturing (7%), mining (5.5%), electricity, gas and water supply (7.6%). Most economists expected the upswing anyway because there has been evidence of acceleration in some high-frequency indicators like passenger car sales, diesel consumption, tractor sales, railway traffic and industrial production over the past few months.
Yet, the numbers also show that deeper structural problems with the economy remain.

First, the Centre’s fiscal deficit at the end of the first seven months of 2017-18 is at 96.1% of the full year target, compared to 79.3% last year. This means that a surge in public investments, which could spur growth, is unlikely, with finance minister Arun Jaitely promising to stick to fiscal consolidation.

Second, while there have been positive green shoots like a good kharif crop this year, crucial sectors are yet to regain their buoyancy. Eight core sectors – coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity – have grown at sluggish overall pace of 4.7% in October, compared to 7.1% in October last year. Agriculture growth, at a measly 1.7%, and construction growth at 2.6% remain big worries.

Third, with banks still under stress, domestic investment remains a challenge. While fresh investments have increased, as proportion of GDP they have continued to decline.

Beyond the hallowed worlds of investors and economists, how much does economic performance really matter politically? The idea that politics follows economics has been conventional wisdom at least since political strategist James Carville put up a notice saying ‘The economy, stupid’, outside Bill Clinton’s campaign office in 1992.

Yet, recent empirical research in the age of Trump and fake news has shown that actually it may indeed be politics that drives economic sentiment. Princeton and Chicago economists who examined data on how people voted and spent their money over several years aver that “partisan bias is exerting a stronger influence on economic expectations over time.” Examining American numbers closely Atif Mian, Amir Sufi and Nasim Khoshkhou, who conducted the study, argue that “individuals have a more optimistic view on future economic conditions when they are more closely affiliated with the party in power in the White House.”

In an age where politics mirrors tribalism, the same facts appear different to different people. Indeed, this may be why demonetisation was seen as a triumph by UP voters for BJP, despite their being at the sharp end of some of its worst discomforts. This helps explain why the economy has become such a political slugfest. It also explains why the culture wars matter so much.

If the hard numbers don’t work out perceptions can always colour them – as they did with UPA-2 in 2014 which got tarred with corruption and economic stasis despite high growth rates. Gujarat 2017 may not fully answer whether politics truly trumps economics or not, but it will certainly provide some of the answers before 2019.

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