A higher-than-expected 7.9% GDP growth in the March-quarter and the 7.6% for the full year - in line with estimates - have come right in time for Prime Minister Narendra Modi to boost his investor presentations during his two-day US trip next week. The high GDP numbers, which confirm India’s status as the world’s fastest growing major economy beating China (which grew at 6.7% in the first quarter of 2016), coincides with the Modi government’s just concluded mega celebrations to mark its two years in power.
Separately, the government on Tuesday released data on eight core sector output which grew by 8.5 percent in April vs 6.4 percent in March, on the back of pick up in output of refinery products, fertilisers, steel, cement and electricity.
If one takes a closer look at the GDP numbers, one can see that growth has primarily come from improvement in private consumption than fresh investments. Private consumption grew by 7.4 percent in 2015-16 as against 6.2 percent in 2014-15, with its share in GDP improving to 59.5 percent from 57.6 percent in 2014-15. Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, attributes the jump in private investments to high dividend payouts by corporations, rather than an increase in investments. The revival in private consumption goes in line with the uptick seen in auto sales numbers and individual loan growth. Good monsoons and the 7th Pay Commission payout will help to maintain the consumption momentum.
The bad news, however, is that private investments haven’t picked up the way it should have, while public investments have remained almost flat. So far, there hasn't been any strong signs of investment revival. Take a look at the gross fixed capital formation (GFCF) figure, which indicates investment activity on the ground. For the full year, GFCF has grown by 3.3% compared with 7.9% in the previous year. As a percentage of GDP, the GFCF has dropped to 29.3% from 30.8% in the preceding fiscal. Clearly, the investment scenario remains weak.
Growth in public spending, which should act as the key driver of growth, marked a sharp drop by 5.4% in fiscal year 2016 compared with 18.45% in the preceding full year, while private investments grew by 12.3% from 10.5% in the previous year. What this means is that the overall investment activity has slackened quite a bit. The reasons are not very difficult to fathom. Business confidence hasn’t picked up over the year. This, coupled with stressed bank balance sheets and low capacity utilisation, has held back fresh investments. It also reflects in the sticky pile of stressed assets in the economy.
The key is to keep public spending high in the approaching quarters until private investments kick in."Private capex will likely remain the missing link for a few more quarters with growth continuing to be heavily reliant on government spending," Bhardwaj said. But, the bigger point of worry for the Modi government should be absence of fresh investments.
Non-event for common man
As Firstpost noted in an earlier article, unless growth percolates to the grassroots, GDP numbers are meaningless to the common man who still awaits fruits of high economic growth. On the one hand, there is data that projects a fast growing economy, while on the other there is a disturbing picture of a hugely deprived population.
According to a United Nations annual report for 2014-15 released last year, India has the world’s highest number of hungry people in the world. Ironically, we have beaten China here too. Of the total of 795 million people in the world, India has 194.6 million hungry people compared with 133.8 million in China. In other words, one-fourth of the world’s hungry population is in India. What does being the citizens of the world’s fastest growing economy mean to the poor in India then?
“It’s a big issue which is hardly discussed,” said Madan Sabnavis, chief economist at Care Rating. “The deprivation of poor (from the fruits of economic growth) is very huge in India,” he said. This is not necessarily the problem of the new methodology, but a larger issue of the inability of the statisticians to assess the quality of the growth in the economy, Sabnavis added. Most economists agree with him, but say there aren’t sufficient alternatives to get a better measurement.
Another concern is the weak banking sector, neck deep in bad loans. Stressed assets (bad loans and restructured loans) currently account for almost 11 percent of the total loans given by the banks. If a banking crisis occurs, that can put the country in reverse gear for several years, forget about competing with China on the economic growth front. With private investment cycle yet to resume, stalled projects are on the rise and the 17-month consecutive fall in exports do not offer any comfort to the economy.
Looking at a broader picture, there has been no corresponding increase in the number of jobs in the economy aligning with economic growth and headlines stating what the GDP numbers have indicated in the recent years. Economists highlight this as a concern since millions join the country's workforce ever year and economic growth should open opportunities for them. This is an issue which the central bank too has flagged in the past.
As an article in the Mint elaborates, data from the Labour Bureau shows that employment growth plunged to a six-year low in 2015 across the eight key labour-intensive industries and only 0.1 million jobs were created last year. This is low when compared with the 0.4 million jobs created in 2014 and even worse than the 0.3 million figure in 2012. So, where has the high economic growth in successive years, whether it is gross value added (GVA) or not, benefited the masses?
To be sure, the Modi government has begun the process of setting the stage for a high-growth phase by addressing the issue of inclusive growth. Its rural-focused schemes, efforts to streamline subsidies by plugging leakages and infrastructure investments have the potential to yield results in the long-term. But, at this stage, there are visible weak areas in the economy. There is no reason for us to celebrate over beating China at growth just yet.