By Chaitanya Gupta
Second advance estimate figures from the Central Statistics Organisation (CSO) reinstate India as the fastest growing economy in the world. The data released on Wednesday showed that India’s GDP grew year-on-year by 7.2% in the quarter ending December 2017, primarily sparked by a revival in investment demand.
The figures revise upwards the full year growth prediction to 6.6%, as opposed to 6.5% predicted by the first advance estimates. The spurt in growth indicates a possible breakaway from the turbulence caused by demonetisation of high-value currency and the chaotic rollout of goods and services tax (GST). To be fair, part of the acceleration can be attributed to a low base effect due to the economic slowdown following these disruptions.
What the numbers reveal
Fragmented analysis of this growth reveals positive trends and a few important concerns. The growth has been propelled by a major spurt in investment demand, with the gross fixed capital formation (GFCF) at 12% in Q3. This is an impressive rebound when seen in the context of negative GFCF in Q4 in 2016-2017 and 6.6% in the previous quarter. The trend of destocking has been reversed and companies have begun investing to add capacity. However, this aspect leads us to two major concerns. First, a major part of this investment is possibly driven by PSUs as part of the fiscal stimulus announced by the government last year. Given fiscal constraints and the government’s recent inability to adhere, it may be difficult to keep this positive trend propped up on public investment.
Additionally, the data shows a deceleration in private consumption expenditure at 5.6% compared to 6.6% in the previous quarter. To be fair, this is partly due to the unfavourable base effect caused by increased consumption in the demonetisation quarter last year. But an increase in investment not accompanied by a growth in consumption is troubling, especially given increasing barriers to international trade as well as India’s limited comparative advantage in exports.
What the growth means for the economy
In light of these issues, it is important that expenditure grows faster in order for the ‘consumption-led growth’ model, as termed by many analysts, to take shape. As rural incomes rise and Pay Commission recommendations come into effect, an upward trend could materialise. In this scenario, it will be important to direct private investment into manufacturing rather than finance activities. The recent budget announcement of long-term capital gains tax will surely help in shifting investment in this direction.
Core sectors such as manufacturing, construction, financial services showed strong growth in Gross Value Added. A major surprise in the last quarter was growth in agriculture. In a year where the rural economy suffered the worst, a 4% growth in agriculture is tremendous. This growth can be accounted for due to a record level of farm output driven by a steady monsoon. However, increasing farmer suicides and the need for loan waivers are testaments to the fact that delivery mechanisms need to be streamlined in order to allow farmers to procure better prices for their products.
A revival of the economy?
An increase in valuables, which grew 40.8% year-on-year, is of concern. It shows a shift of savings due to low-interest rate market. Savings in the form of valuables like gold and precious stones is unproductive and leaves less for channelling into private investment. This problem could aggravate with inflation expected to rise, as shown by higher bond yields and the neutral-to-hawkish stance taken by the Monetary Policy Committee members in their last meeting.
Overall, the economy is on an upward trend through industrial growth. A revival of the economy is bound to be a relief for PM Narendra Modi as India heads into election season. However, boosting rural incomes and enhancing consumption ability are key challenges which, if ignored, could waste away key capabilities developed through investment.
Featured Image Source: Visual Hunt
Stay updated with all the insights.
Navigate news, 1 email day.
Subscribe to Qrius
