Five months after Chief Economic Adviser Arvind Subramanian predicted that economic growth was likely to be closer to 6.5% in the current fiscal year, the Central Statistics Office has forecast that the gross domestic product (GDP) would expand at precisely that pace in the 12 months ending in March. The headwinds that had been flagged by Mr. Subramanian at that time are proving to be the crucial factors dampening momentum. For one, gross value added, or GVA — which excludes taxes that feature in the GDP number — is projected to grow by 6.1%, slowing from a provisional 6.6% in 2016-17, as manufacturing and the agriculture, forestry and fishing components of GVA decelerate. Second, the key investment metric of gross fixed capital formation, though estimated to show faster growth, is expected to shrink in terms of proportion to GDP: to 29%, from 29.5% in the provisional estimates for 2016-17 and 30.9% in 2015-16. With the Index of Industrial Production (IIP) data released in mid-December also reflecting a sharp slowdown over the seven-month period from April to October, there are signs that the rebound seen in the second quarter may be far more vulnerable to unravelling than previously considered. With agriculture struggling for traction, despite a ‘normal’ monsoon, the prospect of private final consumption expenditure regaining vigour in a hurry seems remote, especially since rural households make a sizeable contribution to aggregate demand. The forecast for consumption spending posit both a slowdown in growth to 6.3% in 2017-18, from 8.7% a year earlier, and a marginal contraction in share of GDP.
That softer growth estimates have come at a time when the government’s fiscal deficit has already crossed the budget estimate for the full year, and GST collections are underwhelming, is a particular cause for concern. With Brent crude hovering around $67 a barrel, oil prices are now well above the $60-65 range that the Economic Survey had flagged as having the potential to undermine both consumption and public and private investment. Data on kharif foodgrain production used by the CSO in computing GVA in agriculture, while provisional, project an almost 3% drop in output in 2017-18. This raises the possibility of stronger inflationary pressures on food prices in the coming months. With consumer price inflation having accelerated in November to 4.88%, the fastest pace in 15 months, monetary authorities at the Reserve Bank of India will have little to no leeway to mull interest rate reductions to support growth. On their part, policymakers must bank on building on the measures taken to unclog the credit pipelines, including the recent steps to recapitalise state-owned lenders. Other initiatives must include moves to re-energise the export sector: there may be no better time to make the most of the ‘fair winds’ of a strong global economic rebound that are blowing.
