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Despite tepid 6.5% GDP growth, larger picture positive as govt focuses on economic reforms, ease of doing business

Three years into the NDA rule, the economy has made giant strides in terms of implementation of economic reforms as well as ease of doing business. There has been a large amount of good housekeeping activity which makes the economy and the environment cleaner. However, this has come at a cost of a lower GDP growth which however is not a major concern as it is reversible as the prerequisites for better growth are in place.

Representational image. Reuters.

Representational image. Reuters.

The CSO has projected growth of 6.5 percent which is the lowest in three years. This number would be subject to revisions because it is based on extrapolation of present information available on different variables for the next four-five months. Therefore there are no new assumptions made but pure blowing up of present trends. Hence, interpreting these numbers should be with caution as they come in January when there is maximum information available for just eight months on any variable.

The basic message from the internals of the GDP calculation shows that the main driver of the economy has been the government sector which was also evident from the higher fiscal deficit number touched of late which has also necessitated higher borrowings for the year. Will this continue to be the trend? The answer is yes because, until such time that other sectors show sustained buoyancy, the government has to keep growth ticking. This is one reason as to why adopting a flexible fiscal deficit target makes a lot of sense in the current context. This can also mean that the government will probably ease up on the deficit number for FY19 too to ensure that the economy is on track.

The services sector continues to do well which can be attributed more to the extrapolation of numbers. Trade, transport etc. has registered higher growth of 8.7 percent (7.8 percent) and finance and real estate 7.3 percent (5.7 percent). This should ideally be supplementary to higher manufacturing activity but has been independent of real sector activity. In order to be sustained, the equation must change. If the industry picks up banking business should be upward looking which combined with the focus on affordable housing etc. would provide additional thrust to this sector.

A concern remains on capital formation where the rate has been falling to 26.4 percent from 29.3 percent in FY16. Private sector investment has lagged for two reasons. First, capacity utilisation in manufacturing is low which has come in the way of new investment decisions. Second, until such time that the government is able to resolve the NPA issue, both banks and companies would not be willing to join the game. Some of the biggest accounts that have been referred to the Insolvency and Bankruptcy Code are in this sector and companies would not like to go recklessly in this area. The same holds for banks. Until there is a reversal, the government must be the leader here and hence the budget must have higher allocations in infrastructure.

How soon will we get back to the 8 percent mark? The answer is that it would take another two years as the first step would be to the 7 percent line which should happen in FY19 as the shadow of the two major disruptions would be behind us. In the absence of a bad monsoon, there is a reason to believe that the economy should go well past the 7 percent mark. This year too it was expected when the kharif harvest was good. However, GST did cause disruption in the production and consumption cycles. To an extent, this has been reduced by easing the compliance structures and also lowering the rates on several products and services, which should help. Therefore, there is a reason to be sanguine here.

The second advance estimates will provide a final clue on this story. Presently this number would be indicative of the growth to be assumed in the Union Budget which could be in the 7-7.5 percent range which combined with inflation of say 4-5 percent will provide a larger base of GDP in nominal terms which will provide a cushion for fiscal deficit ratio. Therefore, 1 February will be important when the next big policy statement is presented by the government.

For full coverage of Union Budget 2018, click  here.


Updated Date: Jan 14, 2018 22:51 PM

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