Insights into Editorial: Getting back on track

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Insights into Editorial: Getting back on track


 

Context:

The national income numbers for the second quarter of 2017-18 released by CSO (Central Statistics Office) has come as a relief. Gross Domestic Product (GDP) has grown at 6.3% year-on-year compared to 5.7% in the first quarter but still lower than 7.5% a year ago.

The forecasters and economists were relieved that the announced data had mostly conformed to their expectations. Industry and business people were now hopeful that this was the first instance of a sustained upward trajectory of growth.

The trend of declining growth rate quarter after quarter, which was seen in the last one year, has been reversed. This is a welcome sign. However, doubts and concerns persist for some.

Why is GDP growth rate in Q2 more significant?

It is true that development has many dimensions and for a balanced view, one must look at all of them. Nevertheless, GDP is an important indicator of the performance of the economy, and a faster rate of growth is most often a prerequisite for rapid social development.

GDP growth rate at constant prices during the second quarter of this fiscal is estimated at 6.3 percent which is up from 5.7 percent over the first quarter. It was 7.5 per cent in the corresponding period of last year.

  • The GDP growth has seen a reversal trend from declining trend in the last five quarters.
  • This growth happened on the back of good growth in manufacturing sector, electricity, gas, water supply and other utilities.
  • The manufacturing sector in the second quarter of 2017-18 grew by 7 per cent against 1.2% in the previous quarter. This is really a turnaround. In the corresponding quarter in the previous year, the growth rate was 7.7%.
  • Agriculture, forestry and fishing sectors are estimated to have grown by 1.7 per cent. 
  • The services component of trade, hotels, transport and communications also grew smartly at 10.5% for the half year, as compared to 8.3% a year ago.
  • Three other sectors which have grown strongly are the two subsectors under services — trade, hotels, etc., and public administration — besides electricity and other utility services.
  • The trade sector grew by 9.9%
  • Public administration grew at 6%, much lower than the previous quarters but still reasonably high. In fact, it is a good sign that despite a lower growth of government expenditure, overall growth rate picked up.
  • The growth rate in agriculture was low at 1.7%. This was to be expected because the growth rate in agriculture was very strong the previous year. Even though the monsoon has been good, one should not expect a much stronger growth over a good year. The construction sector grew at 2.6% only. It is yet to recover from the impact of demonetisation. But that should not come as a surprise as demonetisation was directly meant to hurt the way business was being done in this sector.

The most significant aspect of this quarter’s positive result is that it has been significantly bolstered by the growth in manufacturing.

It appears that the manufacturing sector has come out of the disruptions caused by demonetisation and more particularly, the implementation of the goods and services tax.

Discouraging signals

  1. Behaviour of GCFC:

GCFC (which stands for investment activity) refers to the net increase in physical assets within the measurement period. It does not account for the consumption (depreciation) of fixed capital, and also does not include land purchases.

 

It is true that GFCF at current prices grew at 6.3% in Q2 against 2.9% in the corresponding period last fiscal. This shows an improvement in terms of sentiment.

 

However, as the growth rate of GFCF fell below the growth rate of GDP, the ratio of GFCF to GDP has fallen from 27.1% to 26.4%. This is truly disturbing. The fall must be due to a decline in private investment, as public investment during this period has done reasonably well.

 

Without a rise in the private investment rate, sustained high growth cannot be maintained.

 

  1. Doubts about the high growth in manufacturing

Manufacturing too grew faster at 7% compared to only 1.2% during the previous quarter. This data is a bit puzzling since it seems inconsistent with the data on the Index of Industrial Production (IIP), whose growth is only 2.2% during this quarter.

 

There is, of course, a difference between the national income and IIP figures, the former dealing with value added and the latter with total production. Nevertheless, such sharp differences raise some concerns.

 

In the new methodology in estimating value added in the manufacturing sector, corporate data play a major role. This approach is not incorrect. Though many committees on savings have recommended the use of corporate sector data, some cross-checking is needed.

 

The government has set up the National Statistical Commission to give credibility to the Indian Statistical System. It must make effective use of it. Perhaps a clear statement from the National Statistical Commission will help to put the doubts at rest.

Exports are the key

The world at large is experiencing one of its strongest growth phases. Indeed, the International Monetary Fund has revised its growth projections upwards for most countries. In such a scenario, India’s sluggish exports are a cause of worry. When the world economy does well, India’s exports should be flourishing.  World trade in 2017 is expected to grow at 1.7% compared to 0.8% in 2016. Improvement in the external environment may help to raise our exports.

The exporting sectors fortunes are closely linked with the manufacturing sector. Exports create jobs, especially in small and medium enterprises. Why can’t India’s small enterprises sell on global portals like Alibaba and Amazon? What are the hurdles? Is the GST framework (with delayed refunds) inhibiting the growth of exports? What are the policy and other bottlenecks? These are the issues that we need to grapple with to sustain an upward growth path.

Need of Private sector investment

After staying at the same level for two quarters, Gross Value Added (GVA) has moved up. This may be broadly taken to mean that the decline in growth rate has bottomed out. Perhaps the glitches caused by GST have been overcome. That only amounts to the removal of a negative factor. Therefore, the immediate prospect is some improvement in the growth rate in the next two quarters.

In the next two quarters, there is not much space for public administration to push the economy. Last year, a reasonable rate of growth was achieved because of the strong growth of government expenditure in all quarters. This year, at the end of the third quarter, fiscal deficit has almost reached the budgeted level. At this stage of the fiscal year, the deficit is running at 96.1% of the annual target. Last year at this stage it was only at 79.3%. However, as chief statistician of India said, pre-pone of the Budget calendar to allow government expenditure to start from April 1 may be one of the reasons.

Even after allowing for some slippage, it is unlikely that government expenditure can act as a driver of growth.

Thus, while one can expect the growth rate to pick up in the second half, any substantial increase depends on the behaviour of private investment which remains intractable. All the improvements in the Ease of Doing Business (EODB) ranking are meaningless unless we see substantial pick-up in private sector investment.

Way forward

For growth to pick up in a strong way, policymakers need to address the issue of declining investment rate.

As pointed out already, the GFCF ratio has fallen to 26.4%. As late as 2014-15, the GFCF rate was 30.8%. Only when the reversal of this trend happens can we be assured of a sustained high growth of 7% plus.

The excess capacity built up during the boom period must have been used up by now. A complex set of factors is keeping down the private investment rate. These factors need to be addressed in order to push up private investment, even as the pace of public capital expenditures, which have shown a pick up recently, is maintained.

We need to acknowledge that unlike last year, this year the government has less fiscal room to pump prime growth. Oil prices have gone up in the past few months, taking away the fiscal dividend.

GST, Real Estate (Regulation and Development) Act, Insolvency Code are all great reforms for the medium to long term.

But the next few quarters call for sustaining consumption, inviting private investment, energising agriculture, and giving a big fillip to exports.