The halo effect

Sakib Sherani June 4, 2021

THE National Accounts Committee has provided a provisional estimate for overall
growth in the economy for the outgoing fiscal year. At 3.94 per cent, the estimate
has surprised everyone, especially given the difficult context for the economy in
2020-21 with the lingering effects of stabilisation and the full-blown impact of the
Covid-19 pandemic.

The growth estimate has sparked a spirited debate in the country, with the
‘econocracy’ — comprising the commentariat, media, Panglossian stock market
analysts, and doomsday economists — consumed by this one data point. Not
surprisingly, the government has seized upon this growth estimate as validation of
its policies, while the political opposition and the government’s detractors are
convinced this is the result of data manipulation.

The kerfuffle surrounding this one data point is revealing about how economic
‘success’ (or failure) is defined by the elite members of the ‘econocracy’. Around
the world, the political and economic elites have reduced the economic well-being
of current and future generations to the attainment of a ‘high’ GDP growth rate. By
doing so, they are skirting existential (and difficult) questions about the growth
process, distributional aspects of the growth, the sustainability and inclusiveness of
it, if the lives of people were changed for the better, and the ecological impact.
Perhaps most fundamentally, the question avoided is: how desirable is growth of
this nature that benefits so few?

Many years ago, at the height of the ‘India Shining’ political slogan, then-
celebrated Indian editor and commentator M.J. Akbar wrote: a “7% growth (rate)
for the 7%”, highlighting the skewed nature of the benefits. Warren Buffet has
described it differently, as a “tide that has lifted all the yachts”.
The fixation across the divide with the headline growth rate is dangerously
misplaced.

At an important level, the fixation with the growth rate is revealing about how
narrow-based and self-serving definitions of ‘economic well-being’ have become.
A high economic growth rate confers a ‘halo effect’, and all other issues —
however existential for a majority of the population — are moved to the shadows.

Having said that, a few short comments about the number itself may be in order to
give perspective. First, the reported growth rate may be implausible to some (and
unpalatable to many), but it is certainly not an impossibility. The momentum in
many economic indicators, especially high frequency ones, was confirming a
strong pick-up in economic activity post-second wave of Covid. Whether this
would have caused GDP to grow by three per cent, 3.3pc or 3.9pc is moot,
however. It should be noted that the order of magnitude between the foregoing
different estimates is not very large.

Nonetheless, the growth bounce is predicated substantially on two factors: a base

effect, and the bumper output of major crops. While exports have done
exceedingly well, the claim that they contributed significantly to headline growth
does not wash, given that the export sector is still less than 10pc of GDP.

The record and near-record output in four major crops (wheat, maize, rice and
sugarcane) has meant a transfer of hundreds of billions of rupees to the rural
economy. While the flip side is higher prices paid by urban consumers (especially
in the case of wheat and sugar), there is a ‘funnel effect’ at work, where the
transfer occurs from a larger number of consumers to fewer farmers; hence, the
positive effect on consumption is more visible.

This boost to rural incomes has driven the sale of cars, motorcycles, tractors, and
various other consumer goods in the economy, providing an important prop to the
large-scale manufacturing sector. The other significant contribution to growth has
come from construction and its allied industries. The robustness of the wholesale
and retail sector is counter-intuitive and is based more on an imputed flow of
‘marketable surpluses’ from the commodity-producing sector (if I remember
correctly the imputed value used by the Pakistan Bureau of Statistics is as high as
33pc).
Overall, how much of the growth was policy-induced? Given that some of the
sectors showed strong momentum on the back of policy measures — such as the
construction package, support to the export sector, and the State Bank’s substantial
injection of liquidity combined with a slashing of interest rates — the government
can rightly claim credit for a significant portion of the growth. Its efforts are even
more commendable given the challenging context. This is amply demonstrated by
the over 7pc contraction recorded by India’s economy in the same period.

On the flip side, factors beyond the control of the government (such as favourable
conditions in the crop sector, and a bounce from the base effect) played a crucial
role as well. The other important question the government should be asking is
‘how sustainable’ is the growth bounce? Already, there are significant headwinds
to growth in the year ahead emanating from IMF conditionality. The finance
minister will also need to be careful with his spending plans. Unless calibrated
well, any fiscal stimulus runs the clear and present danger of overheating the
economy and causing a build-up of difficult-to-manage pressure on the external
account.

All in all, we have been down this path on several occasions in the past,
unfortunately, with loud triumphalism of the mission-accomplished type from
government spokespersons, and gushing accolades from stock market analysts and
other cheerleaders. Each time, the country has failed to maintain its growth
acceleration for more than three to four years. There is a cautionary tale in our
recent history.

In the longer run, only much-needed reforms will make growth sustainable. The
silver lining? The government is focusing on the right reform areas such as
agriculture, exports and the power sector. In addition, the finance minister has
talked about ‘inclusive’ as well as ‘sustainable’ growth. If the government
manages to walk the talk, it will be a structural break from the past.

Learning from the past, the government needs to demonstrate a measure of

humility, coupled with a realisation of the long road ahead. It needs to put its head
down and focus on seeing through the reforms it has started, and take a hard look
at areas it has missed.