As GDP rises to 7.2% in December, economy shows signs of recovery; but Q4 won't be a cakewalk

In an election year, if the economy is marching to a high growth trajectory putting the worst behind, that is indeed good talk point for Narendra Modi in his political rallies in 2019 general polls. For the full year, if the GDP comes to around 7.2 percent to 7.4 percent, Modi government will present the pain faced by the economy in the second and third years of its rule as the price paid for important structural reforms such as demonetisation and GST (goods and services tax). That has been the narrative from the party to defend the economic slowdown phase.

File image of Prime Minister Narendra Modi. Reuters

File image of Prime Minister Narendra Modi. Reuters

This is quite clear if one reads between the lines looking at the comments from government top brass on GDP growth trend beginning the second quarter. Let’s call it a Modi luck factor. Remember, Modi had the biggest luck when he took over office in May, 2014—falling crude oil prices. The decline in international crude considerably helped the government on all fronts in managing the economy, mainly in bring down the fiscal deficit and cooling inflation.

After the double whammy the economy faced during demonetisation and flawed implementation of GST, two factors are again coming into play to lift the growth--government spending and revival in private investments. These two growth engines are beginning to fire at the right time for Modi, nothing but, let’s say, the return of Modi luck. This will benefit BJP in the ensuing elections to defend its position and in the 2019 poll battle.

But, if one looks closer at the GDP internals, the revival signs are promising and not mere luck. What is interesting to see in the GVA break-up. Most growth engines are showing some promise compared with the dismal performance in the recent quarters. For instance, manufacturing segment grew at 8.1 percent in December quarter as against 6.9 percent in the preceding quarter, which is critical from the point of view of job generation.

Similarly, agricultural GVA rose by 4.1 percent against 2.7 percent in the preceding quarter but against 7.5 percent in year-ago quarter. Construction showed a 6.8 percent growth compared with 2.8 percent growth in preceding and year-ago quarter. Gross fixed capital formation (GFCF) too shows the investment activity growing at a healthy pace with GFCF at constant prices growing at 12 percent in Q3 compared with 6.9 percent in Q2. These are good signals for the economy if it shows sustainable trends ahead.

What has helped the sudden revival? One, the restocking of goods post demonetisation has helped particularly in the manufacturing sector revival. Secondly, increased government spending has helped to push activities in construction sector and manufacturing, which is crucial for job generation.

For the full year, the numbers may not be still impressive. Even to manage a 6.6 percent growth in FY 18, the Q4 GDP numbers needs to come at 7.1 percent. “For this to happen, strong growth has to be sustained in agriculture and manufacturing which appears to be on course for the former based on the second advance estimates for agriculture,” said CARE rating agency in a note. The trick is in keeping the public spending momentum on. But, this wouldn’t be easy for the simple reason that fiscal deficit in the April-January period has overshot by 113.7 percent of the full-year revised target. The leeway for the government to continue pushing money into construction/manufacturing segment will be limited in Q4, which might cause problems in achieving an impressive full-year figure.

(Data support from Kishor Kadam)

Updated Date: Mar 02, 2018 15:52 PM

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