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GDP growth rate is disappointing; RBI can lower rates further, but it is unlikely to push investment

The Gross Domestic Product (GDP) growth numbers continue to surprise and with all the changes in the methodology and reworking of numbers, making informed conjectures is always difficult.

When the growth numbers for 2016-17 and 2017-18 were scaled up under difficult times like demonetisation and Goods and Services Tax (GST), it was hard to reconcile the numbers with the underlying conditions in the market.

Now, FY19 has been a relatively straight year with only the liquidity crisis being the possible disruption. Yet growth is supposed to be lower at 7 percent for the year which is 0.2 percent lower than what the first Advance Estimate said.

There is the statistical factor which has come to play. When the two earlier numbers were jacked up, it was but natural that growth in FY19 would be lower. Hence even the Q1 and Q2 numbers have been rolled back to 8 percent and 7 percent. But otherwise how does it look?

Agricultural growth is a dampener at 2.7 percent and could point to a weaker rabi harvest. It also stands to reason now that when it is announced that there is a bumper harvest, it does not mean that the gross value added (GVA) will increase.

 GDP growth rate is disappointing; RBI can lower rates further, but it is unlikely to push investment

Representational image. Reuters

Lower prices have only added to the agony of farmers. Manufacturing is to do well at 8.1 percent, which is an improvement though there are not too many encouraging signs at the ground.

Performance is good in some segments like auto, durables, cement, steel and electronics. Otherwise, demand is not too buoyant and hence the growth rate of 8 percent plus is encouraging.

The construction sector is the driver with 8 percent growth and here three factors have mattered. First the government spending on roads has been on schedule which has helped the industry to grow. The other has been the relentless focus on affordable housing, which has been a government initiative all the way.

Last, this has come about despite some slack in new construction of commercial property as Real Estate (Regulation and Development) Act (RERA) and excess capacity had come in the way during the year.

The data shows that services dominate with the government sector leading the way with 8.5 percent growth. Here, the sustained capex and revenue spending has helped and has been a saviour at a time when the private sector was not spending.

The trade and hotels sector has been slower at 6.8 percent and the lower collections of GST, which is the proxy used here, is relevant. In fact, it flags the issue of how buoyant are these collections?

Quite clearly, there have been slippages which have also led to some countervailing action by the government on the non-tax revenue side to shore up resources. Lower banking performance has kept the financial sector constrained but the real estate and IT segments have made up for the same.

The interesting takeaway here is that investment will be moving up only marginally from 28.6 percent in FY18 to 28.9 percent in FY19 which gels with the financial story so far where the debt market has been lackluster and bank borrowing has been more to the retail sector.

The fact that we seem to have come towards the end of the non-performing asset (NPA) recognition process is encouraging as this does mean that the basic housekeeping is complete. Also, with more banks moving out of the prompt corrective action (PCA) net, the ground has been set for expansion in the coming year.

The Q3 results are disappointing as growth has slid to less than 7 percent at 6.6 percent. The fact that the three quarters show a declining trend is indicative of some modicum of stagnation in the economy. The non-banking finance company (NBFC) liquidity challenge explains only a small part because the Reserve Bank of India (RBI) had ensured that alternatives were available as banks did spruce up their credit when the crisis got acute.

To a large extent, these lower numbers could be statistical phenomenon as growth rates in the previous year were recorded at higher levels. Construction and power were the two shining sectors, which bode well for the economy.

Given this set of data, how can one position the economy? The numbers show stability but no acceleration, which will require a big push from somewhere. With the elections around the corner, it is unlikely that any big decision will be taken by private entrepreneurs.

The government has also changed its tone from pushing for growth to more of social welfare. Therefore, the expenses announced are more in the form of cash which surely will help pep up consumption but would not add to investment. The investment cycle has to wait for some more time.

The RBI can lower rates further, but it is unlikely that this will help this year significantly in terms of pushing up investment, which will move up only gradually.

Projects need to be viable and the Insolvency and Bankruptcy Code (IBC) cases have to be resolved before investment comes in. The demand story will be critical in FY20 with the usual factors of monsoon playing out its role. Also, employment needs to increase to add to demand which will improve capacity utilisation rates and finally investment. This admittedly is a slow process.

The interesting question will be whether or not the government—Central and states—will be able to continue pecking at what they have been doing. States seem to be already burdened with revenue concerns while the Centre has its job fixed more on social welfare. This is where there can be potential slippage which needs to be watched. It is probably for this reason that the growth for FY20 had not been beyond 7.5 percent, which means that 8 percent is still a bridge that far.

(The writer is chief economist, CARE ratings)

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Updated Date: Mar 01, 2019 11:04:18 IST

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