A 6.7 percent growth rate – the lowest in four years – isn’t exactly a great anniversary gift. And for a government that came to power promising high growth, a four-year average of 7.3 percent may not be something to go to town over, though that’s not bad considering the shock of demonetisation and goods and services tax (GST). At the same time, comparisons with the 7.8 percent 10-year average of the United Progressive Alliance (UPA) government are specious, because of the different time spans and also because of the methodology change. There’s really no point going on with that 'if it were the old method the growth would be lower' line. Under the old method, the last few years of the UPA were disastrous, let’s not forget.
Back to the Modi government’s performance in 2017-18. Only three sectors did better than last year – construction, trade, hotels, communication and broadcasting-related services and financial, real estate and professional services. Of these three, only construction showed a big jump, but that was thanks to a low base – from 1.3 percent to 5.7 percent.
What is particularly worrying is that the investment rate has remained stagnant at 28.5 percent since 2015-16. Growth is being driven primarily by private consumption, the share of which now stands at 59.1 percent. Government expenditure has also been slowly increasing – from 10.4 percent in 2015-16 to 11.4 percent in 2017-18. Growth in all three heads of expenditure was lower than in 2016-17.
But could this investment drought be coming to an end? A quarter on quarter analysis shows that it might. Growth in gross fixed capital formation – the share of which in gross domestic product (GDP) is the investment rate - has been moving up since Q1 (April-June) of 2017-18 when it was stagnant at 0.8 percent. It moved up to 6 percent in Q2 (July-September), 9 percent in Q3 (October-December) and touched a high of 14.4 percent in Q4 (January-March).
Now, this ties in with the improved capacity utilisation data in the Reserve Bank of India’s (RBI) quarterly OBICUS (order books, inventories, capacity utilisation survey). Capacity utilisation moved up from 71.2 percent in Q1 to 71.8 percent in Q2 to 74.1 percent in Q3. There has been a similar inching up new orders. Industry is hardly likely to invest in fresh capacities if existing ones are idle or if new orders are not coming in. On 15 May, the Economic Times had reported that India Inc ‘s capital expenditure announcements over the past four months totalled Rs 50,000 crore.
A word of caution, however, is in order. ICRA’s principal economist Aditi Nayar points out that the investment revival may not be broad-based as companies are adding fresh capacities in limited sectors. The spike in the investment rate in Q4, she says, may be because of an expansion in the central government’s capital spending in that quarter. There has actually been a 7.1 percent contraction in capital spending by 10 state governments that ICRA has studied and the value of new projects and completed projects also contracted in Q4.
In fact, a Crisil research report on the four-year economic record of the Modi government had made a similar point – about the lack of a broad-based investment recovery because of underutilised capacity and high leverage of companies. It noted that private non-financial corporation investment had improved in 2016-17 but this could be because of a few big-ticket projects, notably in telecom.
But when the full year growth is unpacked and looked at on a quarterly basis, there seems reason to believe that the worst may be getting over for the economy. Growth in GDP has been climbing up steadily – 5.6 percent in Q1 (April-June), 6.3 percent in Q2 (July-September), 7 percent in Q3 (October-December) and 7.7 percent in Q4 (January-March). The Q3 and Q4 growth was higher than in Q3 and Q4 of 2016-17 (6.8 percent and 6.1 percent respectively). In fact, the 7.7 percent Q4 growth is the highest in seven quarters, though rejoicing over the fact that this maintains India’s status as the fastest growing economy is a bit much.
Growth in gross value added (GVA, netting out indirect taxes and subsidies) also shows a quarter-on-quarter improvement – 5.6 percent, 6.1 percent, 6.6 percent and 7.6 percent. Three employment-intensive sectors did particularly well in Q4 – agriculture (4.5 percent), manufacturing (9.1 percent) and construction (11.5 percent, but this was on a low base; Q4 of 2016-17 had seen growth decline 3.9 percent). The improvement in construction ties in with growing cement and steel consumption, as the index of eight core industries shows, but how much of this is driven only by government spending is not clear. Manufacturing doing well could mean that industry is adjusting to GST and that implementation glitches are being addressed.
The government’s ministers and economic managers are preening over the good Q4 numbers and saying this is a validation of the structural reforms that it has put in place. They may have a point and there is no denying that there has been macro-economic stability under this government. But this self-congratulation should not lead to smugness. There are far too many dangers lurking in the background.
There is still no clarity on how global oil prices will move. Higher prices could hit consumer spending at a time when industry needs demand. Industry is still not investing as much as it should. GST glitches may be reducing but they are far from fading away; the exporter community is hit hard by delayed refunds worth Rs 20,000 crore and government is only contesting the figure, not the fact of the delay. Public sector banks are still under pressure and the non-performing asset (NPA problem is still a long way from being over.
But the biggest risk is the political class itself and how it behaves in an election year. Will it give in to populist demands that are guaranteed to derail the economy? The recent stalling of dynamic fuel pricing by oil marketing companies ahead of the Karnataka elections and reports that public sector oil refining companies are being persuaded to absorb part of the price increases do not augur well for the economy.
Another test is coming up soon – the selling price of food grains through the public distribution system is due for revision. It was due last year but was deferred. Will the Modi government bite the bullet on this? Will it eschew the temptation of further complicating the GST by allowing for new cesses (it was actively considering the idea in the case of sugar)?
There’s no denying that economic growth under the Modi government has been subdued but stable. The year ahead will determine whether it will maintain this or endanger it for political gains.
(The writer is a senior journalist. She tweets at @soorpanakha)
Updated Date: Jun 01, 2018 08:00 AM