It is now a practice to have an advance estimate of the gross domestic product (GDP) growth profile every year in the month of January. This is odd in a way because data points are available for between 6-8 months for several variables on the basis of which extrapolations are made.
A critical element of these imputations is corporate results which is available till September 2018. Extrapolating any growth number based on first-half performance assumes that the next two quarters will be similar, which may not be the case. Therefore, such advance estimates need to be looked at as more of a statistical exercise, though the likelihood of being in the vicinity of this forecast is still likely. Therefore, the advance estimate of 7.2 percent will be within the range of 7.2-7.4 percent.
Is this number relevant? The answer is still yes, because the Central Statistics Office (CSO) is now talking of a number which is lower than what the Reserve Bank of India (RBI) had reaffirmed in its last policy of 7.4 percent. Also, a number of 7.2 percent is looked at differently from 7.4 percent because psychologically it is closer to 7 percent compared with the latter that looks nearer to 7.5 percent.
Given that growth was 6.7 percent last year, 7.4 percent would appear to be a sharper improvement compared with 7.2 percent. Again, if this number holds finally, then the ascent towards 8 percent in 2019-20 looks a bit more daunting considering that it is now accepted that several business decisions will be deferred till June-end, after the elections results are out and the new policy agenda is known.
The growth numbers presented this time have some surprises. Agriculture is to grow by 3.8 percent based on the first advance estimates of agricultural production. The rabi sowing pattern is not too encouraging presently and hence this number could be a bit optimistic unless things change drastically in the coming month.
Manufacturing growth is to be better at 8.3 percent which is premised on corporate India continuing to do well. While this looks possible, it must be remembered that the base effect, where the growth numbers last year were substantially higher in Q3 and Q4 post-Goods and Services Tax (GST), could be a barrier this time.
Last year, companies had de-stocked in Q1 due to the impending GST implementation. Subsequently, they restocked in Q3 and Q4 which helped to push up growth. This being the case, a similar picture is not expected this time. The Index of Industrial Production (IIP) which is used for valuing 25 percent of manufacturing output would tend to be low from now on with the base effect kicking in.
Construction has been another booster this year which is based on cement and steel which have been buoyant. Credit for this should go to the housing sector in particular coupled with roads as the thrust given by the government has been quite remarkable. In fact, if this is juxtaposed with retail bank lending, it is evident that housing has been one of the prime drivers of the economy. This should carry on for some more time.
The services sector has not been up to the mark. Trade, transport, communication etc., has grown at a slower rate and here the clue is the GST collections which have been slow. Taxes are used as a proxy for some of these components especially trade and the shortfalls witnessed in most of the months has led to this slower estimate.
The financial sector has maintained growth at a slightly higher rate of 6.8 percent. But given that we have had a liquidity crisis for three months this year and the banking sector is still grappling with the non-performing asset (NPA) issue, using growth in credit and deposits as proxies may be overstating the optimism.
Last, the government sector has again been projected to be the leader with growth of 8.9 percent on top of 10 percent last year. This is good news but may have to be modified in case the government has to trim down some expenses to meet the 3.3 percent fiscal deficit mark. While the government has assured that this contingency will not arise, one cannot be too sure.
Interestingly, the basis for being skeptical of these numbers even though most forecasts have been higher than the 7.4 percent-mark vests in the fact that the CSO has used extrapolations of the present into the future to get this number of 7.2 percent. Therefore, there is reason to raise these flags.
Another interesting outcome of these advance estimates is the gross fixed capital formation number which has been placed higher at 29.5 percent compared with 28.5 percent last year. This is the investment rate which is expected to go up this year.
Now, if one looks at debt issuances in the market or bank credit to the non-retail sector, growth in raising resources has been quite lacklustre. Against this background, the number of 29.5 percent looks quite optimistic and may convey a buoyancy that is still to be witnessed given that Centre for Monitoring Indian Economy (CMIE) data on new investment is not too encouraging so far.
Ideally, one should wait for Q3 numbers of GDP to take a more informed call on GDP growth for the full year as a lot of the impact of lower farm income, liquidity issues, forex crisis etc., would tend to be buffered in. The 7.2 percent growth number nonetheless is noteworthy as it will form the fulcrum for all futuristic scenarios that would go into the formulation of the Budget. That’s why it cannot be ignored.
(The writer is chief economist, CARE Ratings)
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Updated Date: Jan 08, 2019 10:35:41 IST