Since the release of GDP data for the second quarter of FY 17-18 by the Central Statistics Office (CSO) on November 30, the focus of debate has centred mainly around whether the economy has finally come out of the slowdown caused by demonetisation and goods and services tax (GST). GDP growth at 6.3 per cent for July to September 2017 quarter indicates that the worst effect of demonetisation and initial problems with GST has receded. The numbers also appear encouraging because they reverse the trend of five-quarter decline from 9.2 per cent in Q4 of 2015-16 to 5.7 per cent in Q1 of 2017-18. This was expected, though, as signs of acceleration in some segments of economy were visible in high frequency data over the last few months.
But, the tendency to cheer and clap at every little upswing without looking deeper into data can be misleading. Reacting to GDP numbers after the CSO released the data, finance minister Arun Jaitley said the rise in GDP growth rate signals a reversal of downtrend witnessed over the preceding five quarters. In his view, the country can now look forward to upward growth trajectory in the coming quarters as it appears poised for a durable recovery going forward. The finance minister also observed that India has standardised itself for a 7-8 per cent growth rate on the back of macro-economic fundamentals. “If it slows down, it is more towards 7 per cent and if it paces up, it is more towards 8 per cent,” he added. The finance minister’s optimism is however, not shared by economists and independent observers. In their view, the reversal in growth could be a ‘dead cat bounce’, given that the road ahead is still bumpy.
The economy may be bottoming out, but the data is also provisional. It is based on coverage of formal economic activity, and hence, will be revised next year when the informal economy, which was badly hit by both demonetisation and GST, is fully covered. Hereafter, the final GDP figure is likely to be lower. Though, growth is better than in the last quarter by 0.6 per cent, it is nowhere near what it was in the second quarter of the last fiscal. Marginal ups and downs in quarterly GDP are quite normal. What’s not normal is a secular trend of decline which was the case earlier. What’s also not normal is a tiny bounce over the low numbers of the previous quarter. Therefore, one needs to wait and watch whether the upswing is sustained over a longer period before giving it thumbs up.
The economy may be on revival path. But the recovery is not without apprehensions as the data is only partly reassuring. The leg up is largely driven by growth in manufacturing, mining, electricity and gas over the previous quarter. On the concern side are agriculture and some of the core sectors like coal, oil, refinery products, fertilisers, steel and cement. Investment – gross fixed capital formation – has declined from 27.1 per cent in the first quarter to 26.4 per cent of GDP. Private consumption is in a difficult spot, while government consumption growth has fallen to 4 per cent from 17 per cent in the last quarter. Add to that, the fall in agriculture output to 1.7 per cent, against 4.1 per cent in the same quarter last years and 2.3 per cent in the last quarter, so the recovery in growth looks fragile.
Despite some green shoots, deeper problems in the economy remain. For instance, stressed balance sheets of companies and banks and NPA issues continue to plague public sector banks. Corporate performance remains subdued. The government’s fiscal deficit at 97 per cent of the full year target at the end of seven months is a big negative because if the government sticks to its fiscal consolidation plan, it has little room to increase public investment to stimulate growth. Another worry is India’s falling exports, despite better global growth and higher imports, India has seen an economic slowdown over five quarters. With oil not giving the kind of comfort it provided earlier and inflation being a worry, the economy will continue to be rattled by several challenges.
The average 7.5 per cent growth in the last couple of years came largely on the back of crash in oil prices and against the backdrop of weak investment, exports volume and credit growth. Hence the showdown is in the system as major engines of growth – private investment, exports, agriculture, private consumption and government expenditure – have slowed down. That’s the reason why the economy has continued on a weak trajectory. As a result, full year growth outlook for the current fiscal has been revised downwards by several agencies, analysts and think-thanks. While the Economic Survey sees growth at the lower end of 6.75–7.5 per cent band, the RBI hopes it will be around 6.7 per cent and Morgan Stanley has revised its forecast to 6.4 per cent from 7.6 per cent. Almost all rating agencies have also given Indian economy downward revision. The consensus estimate for annual growth is between 6 and 7 per cent.
Even if GDP growth is a tad below 7 per cent, it however, does not change the larger picture: the showdown is real, even if there are signs of revival. High GDP growth number is always better than a low GDP growth number. But a lot depends on how we look at the data: often we tend to focus more on the headline number and ignore the welfare aspects of growth. The government tends to rely on the headline number, particularly when it is favourable, as a benchmark to claim success for its policy initiatives. However, since GDP is an aggregate value of economic activities, it does not convey anything about the nation’s performance on social and welfare indicators.
Higher growth in a developing economy is highly desirable. The important point is how inclusive it is and whether it is generating enough employment, reducing income disparity, increasing quality of public services and improving overall quality of life for all citizens. It is quite natural to celebrate reversal of a declining trend in growth, but whether the recovery is broader enough to support improvement in social and welfare aspects of life should also be given due importance. Since GDP is not a complete indicator of development and well-being, the focus of the political class on growth in economic activity should not exclude lack of development on other parameters.
The author is an independent senior journalist.