GDP growth: Is the economy really on recovery path?
We are hearing some good news on the economic front along with some warning signs and many unanswered questions.
Let us first look at the good news. The GDP growth has increased from 5.7 per cent in Q1 to 6.3 per cent in Q2 of FY 18. This is not a great figure by any chance but it appears that five quarters of declining growth has at least bottomed out. More encouraging is the growth in manufacturing which stands at 7 per cent in Q2. An industrial recovery is good news for the economy which may signal more revenues for the government, but more importantly more job creation.
Let us now look at the negatives and the warning signs. One big negative is the agricultural growth seen at 1.7 per cent. This is real bad news. The farming community is becoming restless and there are heavy signs of despair in the rural markets. This government has not done justice to the agricultural sector and except for 2016-17, the growth rate has been pathetic.
Another worrying feature is the fiscal picture. The fiscal deficit is very high and the share market has reacted negatively to the high fiscal deficit. The government may clamp down on its expenses and public investment which may slow down the growth. Alternatively, the government may allow higher fiscal deficit than the target of 3.2 per cent. A third alternative is higher revenue from disinvestment. I think a small slippage from 3.2 per cent is the most preferred option. It is more important to keep the growth momentum going.
Some caution is required while analysing the data generated. This was the first quarter with GST on most items except petroleum products. Thus, analysis of GST growth in Q2 as compared to Q1 must be done empirically. The GST growth of Q2 has been done as per the growth of sales tax on petroleum products in Q2 as compared to Q1. Q2 is the first quarter with GST figures. Computation in Q3 should be easier.
Another warning sign is increased prices of petroleum products. The prices have gone up by 25 per cent in the last quarter. This will directly cut growth in the remaining period of this accounting year. A further increase will be bad news for our economy.
Let us look at the unanswered questions. The growth in three quarters of 2017 has been 6.1 per cent, 5.7 per cent and 6.3 per cent. Let us assume a growth of 6.7 per cent in the fourth quarter. This will give us an average growth rate of 6.2 per cent. Our growth in Q3 of 2016 just preceding demonetisation was 7.6 per cent. There is a decline of 1.4 per cent in economic growth. This means a loss of Rs 2.1 lakh crore. There is an additional loss faced by the RBI of 30,000 crore. A total loss of Rs 2.4 lakh crore. This may not be entirely due to demonetisation and GST could be a factor. I would not like to pass any judgement on this.
An attack on black money has its benefits. It is for our policy-makers to decide whether this one-time loss was worth the benefits in the long-run. It must also be kept in mind that most of the pain has been felt by the unorganised sector and the poor.
The world economy is in good shape. It is seeing the best growth in past couple of years. We have not been able to utilise this good period to the best of our ability. Low oil prices have been a bonanza which has helped in propping up our growth.
It remains an open question whether the government was right in mopping up the reduced prices by hiking taxes across the board and stepping up public investment. One wonders whether reducing oil prices could have helped in creating a consumption boom and helped in the stepping up of private investment.
The gross domestic capital formation continues to be low. It is at 27 per cent which is one of the lowest for a long time. We had reached a high of 38 per cent in 2007-08. This has to go beyond 30 per cent if we are to see some private investment.
Our improvement in ease of doing business will help more investment to come in. Our fiscal deficit figures will no longer allow more public investment, and it is imperative for private investment to take over.
The prime minister is very strict about probity and, hence, has spent much time tightening the systems so that subsidies and public money is spent meaningfully. This is a welcome development, but care has to be taken that other areas are also addressed.
There is an old saying about painful reforms. Make haste slowly. To this, I may add, do not make it your focus and try to do too many things at the same time. The desired results do not come and the process becomes very long and painful.