GDP data: Economy turning the corner; is the demonetisation shock finally over for India?

The good news in the economic growth figures released on 28 February (the second revised estimates for the current fiscal) is not just that the economy appears to be definitely turning the corner, but also the fact that one perpetual source of worry – private investment – seems to be reviving. At first glance that doesn’t seem to be the case. As a share of gross domestic product (GDP), gross fixed capital formation (GFCF), a proxy of investment activity, is expected to remain static at 28.5 percent in 2017-18 (the same as in 2015-16 and 2016-17). Growth in GFCF, estimated at 7.6 percent in the current fiscal, is lower than the 10.1 percent growth logged in 2016-17. But if one looks at quarter on quarter performance, there are signs of revival. Growth in GFCF was a mere 1.6 percent in the first quarter (Q1, April-June), increased to 6.9 percent in Q2 (July-September) and went up further to 12 percent in Q3 (October-December) – higher than the 8.7 percent growth in the same period of the last fiscal. Government expenditure and private consumption expenditure are still driving growth – their respective shares in GDP are estimated at 11.4 percent and 58.9 percent, but the share of private consumption expenditure has fallen from 59 percent to 58.9 percent. The government should go all out to ensure that this nascent investment recovery is not a flash in the pan. The quarterly data shows the economy appears to be shrugging off the lingering effects of the demonetisation shock of November 2016 and the shock of the start of the goods and services tax (GST) regime in July. Quarter by quarter it appears to be inching its way up. Gross domestic product (GDP) grew 5.6 percent in Q1, 6.4 percent in Q2 and 7.2 percent in Q3. The same picture emerges in the case of growth in gross value added (GVA) – 5.6 percent in Q1, 6.2 percent in Q2 and 6.7 percent in Q3. [caption id=“attachment_4308637” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] This has meant a bumping up of the growth projection for the full year (though most of the growth numbers lag those of 2016-17). The first advance estimates released in January, without the benefit of data for the full Q3, had projected a 6.5 percent growth; this has now been revised to 6.6 percent. Growth in GVA has also been revised upwards - from 6.1 percent in the first advance estimates to 6.4 percent now. What the government can take heart from is the fact that the recovery is broad-based and, more importantly, construction and manufacturing – two sectors crucial for employment generation - both show a revival. Manufacturing, which kicked off the current fiscal posting a decline of 1.8 percent, grew 8.1 percent in Q3. This is in line with trends in the movement of the purchasing managers index (PMI) as well as the Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS). The Nikkei India PMI has remained above the neutral 50 level for seven months now, even though it fell to 52.1 in February from 52.4 in January. The report says companies are reporting improved underlying demand and that new orders rose for the fourth successive month. More importantly, companies were reported to have raised their staffing levels during February. Growth in construction has also been inching up – from 1.5 percent in Q1 to 6.8 percent in Q3 (the last is said to be a 24-quarter high, according to a State Bank of India Ecowrap report). Data for the core sector, also released on 28 February, shows cement demand is also picking up (though the high growth rates of 18 percent in November and December and 20 percent in January have to do with a low base). Agriculture will continue to worry. For the year as a whole, growth is estimated at 3 percent, half of the 6.3 percent logged in 2016-17. This is in spite of the fact that the second advance estimates of production of major crops presents a better picture than was initially estimated. So, politically, this sector will continue to pose challenges for the government – production and pricing are both going to be problematic and there are no quick-fix solutions for this sector. The latest data may provide some measure of relief for the government but there are still dark clouds hovering on the horizon, especially global crude prices. One still doesn’t know how the implementation of the e-way bills affect GST collections or the small and medium sector. The government clearly has its work cut out for it. It needs to rise to the challenge. (The writer is a senior journalist and tweets at @soorpanakha)