The CSO’s provisional GDP estimates for the fourth quarter and full year FY17, released recently, had dire news to impart.
They revealed that India’s real GDP growth skidded sharply to 6.1% in the January-March quarter of 2017, after averaging 7.2% in the first nine months of the fiscal year. This slump lost India the ‘fastest growing economy’ tag allowing China to edge ahead. But some commentators are cheering.
Why? Well, with the latest numbers demonstrating that the economy did take a sizeable knock due to the note ban, sceptics now appear more convinced that the official statistics aren’t dressed up.
Here are four interesting trends from the latest GDP estimates.
Q4 bore the brunt
Most sectors of the economy bore the brunt of the note ban in the fourth quarter of 2016-17 and not in the third quarter, when the thunderbolt move was announced.
When the CSO released its second advance estimates in February, many commentators expressed surprise that GDP growth held up at 7% in the critical October-December quarter. But the latest estimate says that growth gave way to 6.1% in January-March 2017. Gross Value Added (a closer measure of economic activity) slid to 5.6% in Q4 from 6.7% in Q3.
A sector-wise break-down tells us that the sectors that were expected to be hit hard by the note ban did take a knock. In Q4, the construction industry saw a 3.7% contraction compared with a 3.4% increase in Q3.
Manufacturing growth fell to 5.3% from 8.2%, despite the new series of Index of Industrial Production (IIP) showing factory output in better light. Services such as trade, hotels and transport slowed to 6.5% growth, from 8.3%.
Why did demonetisation have a delayed impact? One explanation is that strong festival season sales in October masked the disruption to consumption in November and December in Q3. In Q4, without such one-offs, the real impact was evident.
It should be kept in mind that even the latest GDP estimates may get revised downwards in the coming months, as they do not fully reflect the performance of the informal sectors of the economy. Both the advance and provisional estimates of GDP are extrapolated based on high-frequency indicators such as the IIP, sales tax collections and the quarterly results of listed companies, which represent the organised sector. Private industry, both manufacturing and services, suffered a body blow from demonetisation. But a rebound in the farm economy and a spending spree from the government helped prop up economic growth to 7.1 per cent for the full year.
The latest estimates show all private sector components of the economy decelerating in FY17. Growth in mining GVA fell off a cliff from 10.5% in FY16 to 1.8% in FY17. Manufacturing slumped from 10.8% to 7.9% and services from 9.1% to 6.9%.
However, a good South-West monsoon boosted growth in agriculture GVA to 4.9%, from 0.7%. Pay Commission largesse saw Government expenditure expanding by 11.3% in FY17 compared with 6.7% in FY16, providing a mini-stimulus to the economy.
But over-reliance on the government is not great news for the long-term health of the economy, or the aspiration towards ‘less government’. Given fiscal constraints, a government spending binge extracts a toll on taxpayers. A repeat of that agricultural growth depends on a munificent monsoon this year. Much, therefore, depends on the private sector regaining its mojo.
Investment slump
For economic growth to create jobs, demand for goods and services has to fuel investments in new factories and offices. But the investment leg of the economy remains in a moribund state.
Of the four key legs of GDP on the expenditure side, in FY17, private spending (despite the demonetisation shock) registered healthy growth of 8.7% compared with 6.1% in FY16. Government spending zoomed to 20.8% from 3.3%. But growth in new investments slumped to 2.4% from 6.5%. During the boom years from FY03 to FY08, the number averaged above 15%.
Of late, conditions have turned favourable for a restart of the investment cycle. The Government has been ironing out issues in stalled projects. Interest rates have plummeted. But the private sector is still saddled with excess capacity and only an exceptional rebound in consumer demand can revive its animal spirits.
Nominal growth returns
While economists look mainly at the real GDP (growth in the volume of economic output without inflation) to assess the state of the economy, nominal growth (economic growth in value terms) is quite important to the aam aadmi .
On this score, there’s good news in the latest numbers. With inflation (at the wholesale level) shooting up in recent months, GVA at current prices has staged a sharp improvement from 8.7% in the first quarter of FY17 to 11.3% in Q4. Nominal GDP growth, which had slumped from 13.8% in FY13 to 9.9% in FY16, has revived to 11% for FY17.
It is nominal GDP growth that determines increases in income for farmers, entrepreneurs and the salaried. Profit and sales growth for India Inc. are also pegged to nominal rather than real GDP growth.
Overall, if the rain gods prove benevolent and the private sector regains its animal spirits, the economy may see its sporadic green shoots sprout into foliage this fiscal.
