Assessment on Latest Growth Revival

What is the issue?

• The latest economic data from the Central Statistics Office revealed a 7.2% growth in India’s GDP in the last quarter.
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• The numbers call for an assessment of the real picture of economic revival.

What are the positives?

• The growth is an acceleration from the 6.5% posted in the previous quarter.
• The relative development is indeed a cause for optimism.
• Importantly, the gross fixed capital formation, a key measure of investment demand, has shown a healthy improvement.
• Sectoral gross value added (GVA) figures also reflect a broad-based pickup in activity.

What are the concerns?

• Slowdown - The only three slowdowns in the last quarter are:

1. mining
2. utility services (including electricity, gas, and water supply)
3. trade, hotels, transport and communication services

• The contraction in mining is of particular concern.
• Base effect - The October-December quarter in 2016 was the period of implementation of the demonetisation drive.
• So the latest third-quarter data largely bears the base effect of this period.
• This indicates that the growth trends are to be understood more in comparative terms.
• Full financial year - The sectoral GVA data at a quarterly level appeared to give promise of a more enduring recovery.
• However, the same GVA data for full-year projections show decelerating momentum in 5 of the 8 core sectors.
• Of particular concern is the farm sector, where growth is set to slow to 3% from 6.3% in the previous fiscal.
• Also, in manufacturing, the pace is expected to come to 5.1% from 7.9% in the revised estimate for 2016-17.
• The latest subdued Index of Industrial Production numbers further add to the concerns.
• The CSO’s second advance estimates of national income for the full financial year are also a lot more worrying.

What do all these imply?

• The private final consumption expenditure, a crucial driver of economic momentum, is yet to gain traction over the full financial year.
• Clearly, it is increased government spending that has driven the recent economic expansion.
• Moreover, the space for more capital pumping is also restricted.
• This is because the fiscal deficit at the end of January has already exceeded 113% of the revised estimate for the full year.
• Any more government spending has the risk of affecting price stability. It possesses the risks of leading to inflation.
• Added to these are the concerns of bad loans in the banking sector and the recent wake of bank frauds.
• Also, the exporters are still to make the most of the revival in global trade demand.
• Given all these, the economy has still not got to a healthy status and thus calls for concerted action.

Source: The Hindu