Assessment on Latest Growth Revival

What is the issue?

The latest economic data from the Central Statistics Office revealed a 7.2% growth in India’s GDP in the last quarter.
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The numbers call for an assessment of the real picture of economic revival.

What are the positives?

The growth is an acceleration from the 6.5% posted in the previous quarter.
The relative development is indeed a cause for optimism.
Importantly, the gross fixed capital formation, a key measure of investment demand, has shown a healthy improvement.
Sectoral gross value added (GVA) figures also reflect a broad-based pickup in activity.

What are the concerns?

The contraction in mining is of particular concern.
Base effect - The October-December quarter in 2016 was the period of implementation of the demonetisation drive.
So the latest third-quarter data largely bears the base effect of this period.
This indicates that the growth trends are to be understood more in comparative terms.
Full financial year - The sectoral GVA data at a quarterly level appeared to give promise of a more enduring recovery.
However, the same GVA data for full-year projections show decelerating momentum in 5 of the 8 core sectors.
Of particular concern is the farm sector, where growth is set to slow to 3% from 6.3% in the previous fiscal.
Also, in manufacturing, the pace is expected to come to 5.1% from 7.9% in the revised estimate for 2016-17.
The latest subdued Index of Industrial Production numbers further add to the concerns.
The CSO’s second advance estimates of national income for the full financial year are also a lot more worrying.

What do all these imply?

The private final consumption expenditure, a crucial driver of economic momentum, is yet to gain traction over the full financial year.
Clearly, it is increased government spending that has driven the recent economic expansion.
Moreover, the space for more capital pumping is also restricted.
This is because the fiscal deficit at the end of January has already exceeded 113% of the revised estimate for the full year.
Any more government spending has the risk of affecting price stability. It possesses the risks of leading to inflation.
Added to these are the concerns of bad loans in the banking sector and the recent wake of bank frauds.
Also, the exporters are still to make the most of the revival in global trade demand.
Given all these, the economy has still not got to a healthy status and thus calls for concerted action.

Source: The Hindu