India Today - - UPFRONT - By De­vang­shu Datta

The macro-eco­nomic data for Ju­lySeptem­ber 2017 (Q2) in­di­cates that the In­dian econ­omy may be pulling out of a trough af­ter five suc­ces­sive quar­ters of lower GDP growth. GDP grew at 6.3 per cent in Q2, hav­ing fallen to 5.7 per cent in Q1.

The pull­back is at­trib­uted to the man­u­fac­tur­ing sec­tor climb­ing 7 per cent year-on-year ver­sus Jul-Sep 2016. This is a con­sid­er­able im­prove­ment over the 1.2 per cent growth in Q1. The other big gainer was min­ing, which rose by 5.5 per cent af­ter de­clin­ing in Q1.

Agri­cul­ture re­mained in the dol­drums, though, with growth at 1.7 per cent, which was even lower than the 2.3 per cent logged in Q1. Gross Fixed Cap­i­tal For­ma­tion, which is a key in­di­ca­tor for pri­vate in­vest­ment, grew at 4.7 per cent dur­ing Q2, which was bet­ter than the anaemic 1.6 per cent of GFCF growth in Q1.

Fi­nance Min­is­ter Arun Jait­ley hailed these num­bers, as­sert­ing that the dis­rup­tion caused by GST and de­mon­eti­sa­tion was over. The num­bers did boost sen­ti­ment along with other pos­i­tive data points like higher au­to­mo­bile sales, the Moody’s up­grade of In­dia’s sov­er­eign rat­ing, the jump in World Bank Ease of Do­ing Busi­ness rank­ings etc. At the other end of the po­lit­i­cal spec­trum, for­mer fi­nance min­is­ter, P. Chi­dambaram called this a “pause in the fall­ing trend of growth” and Dr Man­mo­han Singh said he thought the ill-ef­fects of de­mon­eti­sa­tion had not yet been fully purged.

The man­u­fac­tur­ing pickup in­di­cates that the “de­stock­ing” that pre­ceded GST was tran­sient. In April-June, man­u­fac­tur­ers cut back pro­duc­tion and sold off in­ven­tory for fear of be­ing hit by GST dis­rup­tion. “Re­stock­ing” has ap­par­ently hap­pened in Q2, with man­u­fac­tur­ers ramp­ing up pro­duc­tion.

These are pre­lim­i­nary es­ti­mates and the er­ror fac­tors may be pretty high. GDP in­cludes net tax col­lec­tions, which are fuzzy, un­known num­bers for Q2, given the com­plex­ity of the new GST sys­tem.

The GST in­volves off­sets and cred­its up and down the value chain, and we don’t know what net col­lec­tions will be. This could work both ways—there may be a bump up or a draw­down in fi­nal es­ti­mates.

Ac­cord­ing to Chief Statis­ti­cian T.C.A. Anant, the MoSPI used sales tax col­lec­tions from items kept out­side the GDP net to make a proxy es­ti­mate of likely tax col­lec­tions. To add to com­pli­ca­tions, ser­vice tax was sub­sumed into GST (at a higher rate of 18 per cent GST, ver­sus the ear­lier 15 per cent for ser­vice tax) and ran into sim­i­lar cal­cu­la­tion prob­lems. Since ser­vices con­trib­ute over 50 per cent to GDP, the proxy cal­cu­la­tions there may also have big er­rors.

An­other fac­tor that is hard to es­ti­mate is con­sump­tion, due to the sea­sonal ef­fect of fes­ti­val. Durga Puja (Navra­tri as North In­di­ans call it) and Di­wali are pe­ri­ods when house­hold con­sump­tion spikes. At the same time, these are hol­i­days, so in­dus­trial pro­duc­tion drops. Since these fes­ti­vals don’t fall in the same cal­en­dar months every year, dis­tor­tions are caused. This year, Durga Puja was in Septem­ber, while it fell in Oc­to­ber last year. Fes­ti­val con­sump­tion in Septem­ber 2017 would have been higher com­pared with the ‘nor­mal’ level of Septem­ber 2016. So we can’t as­sess if con­sump­tion has gen­uinely im­proved.

There were a few dis­qui­et­ing data points too. Trade deficit ex­panded in Q2. Ex­ports grew a bit, but im­ports shot up. This is a sign GST did cause dis­rup­tions—con­sumers turned to im­ports to meet de­mand for items that In­dian man­u­fac­tur­ers could not meet be­cause value-chains were hit.

A sec­ond dis­qui­et­ing data point is the high fis­cal deficit. About 96 per cent of the bud­geted full-year fis­cal deficit had been spent by Oc­to­ber—the gov­ern­ment was spend­ing to keep growth tick­ing over, through the GST dis­rup­tion. But it doesn’t have much lee­way to con­tinue with this strat­egy un­less it’s pre­pared to let the fis­cal deficit shoot up to un­ac­cept­able lev­els.

The GDP fig­ures are en­cour­ag­ing. But they must be in­ter­preted with cau­tion. The fi­nal es­ti­mates could go ei­ther way—higher or lower.

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