Get­ting back on track

The GDP num­bers are good but for growth to pick up fur­ther, we need to push pri­vate in­vest­ment

The Hindu - - EDITORIAL - C. Ran­gara­jan

The na­tional in­come num­bers for the sec­ond quar­ter of 2017-18 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. 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.

Signs of re­vival?

Is this a flash in the pan or is it a sign of a re­vival? Can we ex­pect a fur­ther rise in the growth rate in the rest of the year? Some peo­ple are dis­turbed by the ex­ces­sive fo­cus on GDP and its growth rate. 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.

What are the en­cour­ag­ing signs flow­ing out of the data on GDP for the July-Septem­ber quar­ter? For this, we need to look at sec­toral growth rates. The most en­cour­ag­ing sign is the per­for­mance of the man­u­fac­tur­ing sec­tor which grew at 7% against 1.2% in the pre­vi­ous quar­ter. This is re­ally a turn­around, if we don’t dis­pute the num­ber. In the cor­re­spond­ing quar­ter in the pre­vi­ous year, the growth rate was 7.7%. 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 (GST).

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% and there is some in­di­ca­tion by the Chief Statis­ti­cian, T.C.A. Anant, that there could be some un­der­es­ti­ma­tion here.

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. Some cal­cu­la­tions show that ex­clud­ing agri­cul­ture and pub­lic ad­min­is­tra­tion, the GDP growth rate in Q2 was 6.8% com­pared to 3.8% in Q1. The elec­tric­ity sec­tor has done well with a growth rate of 7.6% com­pared to 7.0% in Q1.

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.

Dis­cour­ag­ing sig­nals

The most dis­cour­ag­ing sign is the be­hav­iour of the Gross Fixed Cap­i­tal For­ma­tion (GFCF). 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.

There are some doubts about the high growth in man­u­fac­tur­ing. In this con­text, an­a­lysts draw at­ten­tion to the dis­par­i­ties be­tween the rate of growth in the in­dex of in­dus­trial pro­duc­tion (IIP) and na­tional in­come statis­tics. For ex­am­ple, in Q2 of 2017-18, man­u­fac­tur­ing un­der IIP grew at 2.2%. 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, in­clud­ing the one headed by me, 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.

The road ahead

What do the num­bers say about the fu­ture? 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. 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.

Yet an­other fac­tor in­flu­enc­ing growth is ex­ports. In­dia’s ex­port per­for­mance has picked up in the cur­rent year. In terms of growth rate, it was do­ing rea­son­ably well. Dur­ing April-Septem­ber, ex­ports grew by 11.52%. But there was a set­back in Oc­to­ber with the ex­port growth rate turn­ing neg­a­tive. How­ever, the world econ­omy is gen­er­ally look­ing bet­ter this year. 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. This may be an­other pos­i­tive fac­tor in­flu­enc­ing growth, even though it is dif­fi­cult to say how strong it will be. All in all, it ap­pears that the GDP growth for the year as a whole may be around 6.5%.

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.

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