GDP growth on track this time; numbers suggest the economy is poised for stable expansion
If all elements come together, there would be a good chance of the economy bouncing back to 7.5 percent growth in FY19.
The GDP growth rate for financial year (FY) 2017-18 has come in at the expected rate of 6.7 percent which is below the rate of FY 2016-17. Therefore, performance is still sub-optimal compared with FY17 when it was 7.1 percent despite demonetisation. In FY16 it was 8.2 percent.
However, the better part of this episode is that growth has picked up continuously this year across the four quarters, to end at 7.7 percent in the fourth-quarter (Q4) from 5.6 percent in the first-quarter (Q1). This definitely looks like there has been a distinct recovery from whereon conditions would get better. How has this happened?
There has been a fair contribution from various segments and hence has been an all-round performance. The advantage of a low base helped in Q4, though for the entire year performance has been virtually on track except for the mining sector which grew by just 2.9 percent (13 percent).
Let us look at the full year's performance first. The government sector led the way with a 10 percent growth in public administration and supported by construction with 5.7 percent (1.3 percent). The allocations made on roads, railways and urban development have helped to keep the pace ticking during the year. While higher expenditure was imperative in FY17 when the economy was buffeted by demonetisation, the renewed push this year has helped significantly.
Growth in manufacturing was lower this year at 5.7 percent compared with 7.9 percent which can be explained by the shock of the Goods and Services Tax (GST) that caused several adjustments to be made by the sector. However, quarterly trends show that the turnaround has come about with the growth rate moving from a negative 1.8 percent in Q1 to a 9.1 percent in Q4. This clearly shows that the direction of growth in the coming months would be upwards, though admittedly the numbers would get moderated from Q2 onwards, when the base effect kicks in FY19.
The services sector has dominated again with robust growth in trade, hotels, transport (eight percent against 7.2 percent) and support from the financial and real estate services. Higher collections of GST have contributed to the former while readjustments in real estate due to RERA and the tenuous state of banking has kept the latter lower at 6.6 percent (six percent). The proxy used here is the GST collections for trade/transport etc, which in turn has been fairly buoyant.
Is the economy poised for a big push in FY19? The answer is clearly a yes, provided the monsoon turns out to be good and there are no shocks in terms of policies. Being a pre-election year it can be assumed that this would be so. The growth rate for agriculture in FY18 has been 3.4 percent over 6.3 percent in FY17. A good harvest would add to this strength. The present forecast by the IMD is positive for the country though there is some caution for the spread in southern and north east India. This could be a cog in the wheel as it has been witnessed that specific crop shocks can upset the apple cart.
While it may be premature to say that the investment cycle has picked up, it is true that the gross fixed capital formation rate has touched a high of 29.1 percent in Q4 even though for the year it has remained static at 28.5 percent for three years now. In Q1 of FY17 it had touched a high of 30.3 percent and then declined. Hence, optimism should not be raised to euphoria as it needs to be seen if these numbers are maintained. The private sector has to play a leading role as the government would be constrained by fiscal targets, to be met considering that it has been tightly packed and any slippage in revenue would increase the fiscal deficit.
To keep the tempo going, the first requirement is to get the banking system in order. While growth of 7.5 percent looks achievable next year, finance will be critical, especially for private investment. Presently with 11 banks under the Prompt Corrective Action (PCA) and private banks also grappling with NPAs, or bad loans, the willingness to lend may be restricted. Borrowing from euro markets may not be an option given increasing interest rates and the rupee being volatile. Therefore, the corporate bond market and the NBFCs may have to play a wider role to finance growth.
Second, private consumption has to pick up and besides the rural demand, jobs need to be created at a faster pace so that there is more spending power. The present workforce with its limited size will not be able to support this requirement. Third, besides the central government, the states too must be involved in infrastructure spending to enhance investment numbers. All this will have to take place in an environment where interest rates would be increased by the Reserve Bank of India (RBI) by 25-50 bps depending on the movement of the oil price headwind.
If these elements come together there would be a good chance of the economy bouncing back to 7.5 percent growth in FY19, which can lay a strong foundation for even higher rates in the coming years. Therefore, it does appear that the Indian economy is poised for stable growth.
(The writer, chief economist, CARE Ratings, is author of 'Economics of India: How to Fool all people for all times')
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