GDP growth up but too early to celebrate

As people, there is an uncanny predictability about the way we, especially the middle class, react to peaks and troughs in the economy. It makes one wonder whether we jump to conclusions too fast. We are either euphoric or overly despondent in judging economic trends. When the country’s growth rate slipped to 5.7 per cent in the first quarter of this year, all hell broke loose. Doomsday forecasters ruled the roost pointing fingers at demonetisation and the onset of Goods and Services Tax (GST). Leading the pack was former Finance Minister P. Chidambaram who has a jaundiced approach to anything that this government does. Now, when there is a pick-up in the figures released by the Reserve Bank for the second quarter (July to September), the media sees it as an economic revival drawing the conclusion that the worst is past us. That is perhaps true but this is a time to wait and watch, not yet for any kind of euphoria.

Significantly, when demonetisation and GST roll-in were announced, there was a word of caution voiced that in the short run growth could suffer a setback. Initial hiccups in the implementation of these measures contributed to the confusion that characterised these major changes. As gloomy forecasts based on hasty surmises swung in, there was a mood of despondency that pervaded the country. The saving grace for the BJP was that its main rival, the Congress, was either in hibernation or ill-equipped to offer itself as a viable alternative. The option of a Rahul Gandhi at the helm of affairs was too stark for people at large to stomach. For all his failings, Narendra Modi was seen as a viable leader at the head of a party that could still deliver. The country and the economy today stand at the crossroads. The future is vital and this is no time to swing to the other extreme of over-confidence.

It is an encouraging sign that manufacturing has posted a smart recovery – from 1.2 per cent in Q1 to 7 per cent in Q2. This could mean that the ill-effects of de-stocking in anticipation of GST are petering out. The construction sector, which was in seeming doldrums with demonetisation and the Real Estate (Regulation and Development) Act or RERA having both contributed to a downturn, is showing signs of picking up, albeit haltingly. While the sector had declined by 3.7 per cent in the fourth quarter of 2016-17 (January to March), it showed marginal growth of two per cent in the first quarter of this year, improving to 2.6 per cent in the second quarter. Yet, the sector is not out of the woods and needs to be watched closely, with cautious corrective measures. The RERA is intrinsically a good legislation which needs to be built upon. That there is cause for caution, which is borne out by the fact that cement production in the second quarter declined 1.6 per cent over a growth of 4.9 per cent in the same period of the last fiscal. In agriculture, the signals are far from reassuring. A Q2 growth of 1.7 per cent after a Q3 and Q4 revival in 2016-17 is quite disconcerting. That it is the lowest in five quarters speaks for itself. And that it is all due to the vagaries of weather would be an over-simplification. While Q2 is generally a period of low growth in agriculture, the next quarter would be crucial in deciphering if there is a real downturn in this vital sector.

Another worrying factor is that private consumption, which has shown a decline in the second quarter of this year, may reflect lack of demand necessitated by declining disposable incomes. It has to be the business of this government to revive demand and consumption so that the economic growth picks up momentum. Private investment too offers scope for improvement. While it grew by 4.6 per cent over Q2 of the previous year, its fall by 1.3 per cent over Q1 of this year is hardly reassuring. Its share in GDP fell somewhat from 27.5 per cent in the fourth quarter of the last fiscal to 26.4 per cent in the second quarter of this year. What must cause some disquiet, however, is the fact that the fiscal deficit is burgeoning, having already reached 96 per cent of the year’s target at September-end. This would need to be contained in the remaining part of this fiscal, but with the budget now advanced to February 1, 2018, it may not go out of hand. Collections would have to improve substantially. But if higher growth is to be achieved, we cannot be too sticky about a low fiscal deficit. All in all, there are hopeful signs from the results of the second quarter but there is still much to do to put the economy on a higher trajectory.

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