Taking Forward the Economic Revival

What is the issue?

The second quarter GDP data by the Central Statistics Office (CSO) comes as a sigh of relief for a sluggish economy. (Click here to know more)
It is essential to sustain this momentum in the coming quarters with focus on consumption, private investment, agriculture and exports.

What is the significance?

A declining growth trend in the last four consecutive quarters had finally been reversed.
Industry and business people perceive it as the first instance of a sustained upward trajectory of growth.
An increase in the growth rate, to 6.3% from the 5.7% in the previous quarter, hints at the receding negative effect of demonetisation and GST.
The services component of trade, hotels, transport and communications also grew smartly compared to the previous year.
The data highlights an accelerated industrial growth, and a considerably faster manufacturing growth.
The CSO says that GST collections data are provisional, and could be an underestimate.
To that extent an upward revision of the GDP data is possible in the future.

What is the need for caution?

Private investment - Industrial revival is an absolute must for sustained growth in employment and output.
But it is important that this is accompanied by an increase in private sector investment.
However, private investment is not optimistic as evident from the declining portion of fixed capital formation in GDP growth.
The improvements in the Ease of Doing Business ranking would be meaningful only when there is a substantial pick-up in private sector investment.
Consumption - Nearly two-thirds of India’s GDP is consumption spending, and remains the key to sustaining the growth momentum.
However, mounting inflation rates and weak job creation are keeping the purchasing power under pressure.
Fiscal Deficit - At this stage of the fiscal year, the deficit is running at 96.1% of the annual target.
The higher deficit would have been acceptable had it been on account of higher capital spending.
But at present, it is increasingly due to revenue expenditure component which is growing at twice the rate as budgeted.
Revenue expenditure like salaries, pensions, etc is notably not productive spending as on items like infrastructure.
This unfavourable fiscal condition could also probably be the main reason for the stock markets crashing.
Notably this is despite the data on economic revival, and international rating agency upgrade for India.

Where to focus now?

The weaker components of economy, fiscal indicators and market should become policy focus area now.
To revive the private sector investment, it is essential to focus on:

bettering the capacity utilisation
leveraging of balance sheets
insolvency resolution mechanisms
boosting exports as against the large influx of imports, especially manufactured goods

Investments should be backed by favourable consumption demand which has slipped down in the last two quarters.
Giving a fillip to the sluggish agriculture sector which is a significant contributor to rural incomes and consumption demand is vital.
It is also essential to drive growth in the manufacturing sector to further boost a slowing exports sector and create more job opportunities.
The course corrections in GST regime are essential for this, particularly in the context of hurdles faced by the small and medium enterprises.
The government has to overcome the challenge of rising oil prices and other such global scenarios offering less fiscal room to pump prime growth.

Quick Facts

CSO

The Central Statistics Office (CSO) is a governmental agency under the Ministry of Statistics and Programme Implementation.
It is responsible for the co-ordination of statistical activities in India, and evolving and maintaining statistical standards.
It compiles data on National Income, Index of Industrial Production, Economic Census, Human development Statistics, Consumer Price Index (CPI), etc.

Source: The Hindu