Understanding 8.2% GDP Growth

Why in news?

The GDP estimates show that the economy grew at the rate of 8.2 % in the first quarter of 2018 (April-June).

What is the anomaly in it?

• Despite the impressive growth, a feel-good sentiment has been largely missing.
• There is also confusion on how to interpret the growth while the  economy faces various serious issues like
  1. the depreciating rupee,
  2. rising bank bad loans, or NPAs,
  3. a trade deficit that has shot up to a five-year high,
  4. and retail fuel prices that are inching up every day.

What is the reason for the anomaly?

• Base effect - A part of the reason for this is the low base, which has produced a statistical effect, making growth appear faster.
• Sectoral differences - Some parts of the economy grew faster, while a few others did not.
• Agricultural GDP growth quickened as two successive years of good rains improved farm produce.
• Manufacturing and construction industries, that were dealt a severe shock by demonetisation, recovered.
• Services growth slowed. The sector includes trade, hotels and transport, and the financial, real estate and professional services as well as public administration and defence services.
• Services sector largely represents the economic sentiment of the urban and semi-urban Indians.
• Hence the poor performance of services probably explains the sense of disconnect with the growth estimate being expressed in some quarters.
• Consumption - Private consumption expenditure growth has quickened, relative to the preceding quarter, as well as compared to the same quarter last year.

So what drives the current GDP growth?

• The current GDP growth is largely driven by consumption.
• There are further suggestions that a consumption boom is in the making.
• This is possibly driven by the government salary and pension hikes including at the State level.
• Consumer industries are also reporting robust rural sales growth.

What is the need for caution?

• Unsustainablity - The high growth in the years preceding the 2008 global financial crisis was driven by savings and investments.
• The global economic downturn disrupted this trend and hence investments slowed down.
• There were expectations that this would revive, but the economy is still not out of the investments slowdown.
• So the GDP growth continues to be powered by consumption, and not investments.
• This is a cause for concern as the consumption-led growth is sustainable only up to a point.

• Quarterly estimates - The estimates for the upcoming quarters will not enjoy the benefit of the low-base effect.
• Moreover, the first quarter estimates are early indicators, which may not necessarily be representative of the remaining months.

What are the challenges ahead?

• Sustaining the 8%-plus growth rate beyond the first quarter requires a far more pro-active policy push.
• The rising international crude prices and the risk of inter-country trade wars are some of the global challenges.
• All these are likely to keep the current account deficit, and therefore the rupee, under stress.
• A depreciating rupee could further inflate retail fuel prices.
• The central and state governments can cut the taxes on them but this would increase the fiscal deficit.
• RBI can hike interest rates to arrest the rupee’s depreciation.
• But that will further increase the cost of borrowing, including the government’s debt.
• Reforms to promote growth with appropriate contributions from all the sectors of the economy are essential.

Source: The Hindu