High GDP rates tell half the story
comment Updated: Jun 02, 2016 12:11 IST
National income data released on Tuesday showed that the economy grew at 7.9% in January-March, the fastest in six quarters, and at 7.6% in 2015-16, the quickest in five years. This cements India’s status as the world’s fastest growing major economy. This is a commendable achievement given that China grew at 6.7% during the first three months of 2016. This data could not have come at a more opportune time for the Narendra Modi government. For one, it adds another dimension to the government’s celebration on completing two years in office. It allows the government to underpin the argument that a quick turnaround in the economy has primarily been possible because of the string of reforms it has rolled out. Two, the data will embolden Mr Modi’s sales pitch about India’s impressive economic record during his visit to the United States next week.
There could be a few devils hiding in the details, though. It is important not to overlook the role of persistent low inflation in helping raise India’s ‘real’ GDP growth rate closer to the 8% threshold. Gross Domestic Product (GDP) represents the total value of all the final goods and services that are produced within a country’s borders within a particular time period. It is important to distinguish between nominal GDP and real GDP. ‘Nominal’ GDP is calculated at current prices and does not factor in inflation, while real GDP is GDP adjusted for inflation. India’s nominal or actual GDP grew at 8.7% in 201516, significantly lower than the previous years’ 13-15% growth, which can be an indicator of worrying symptoms of weak investment and consumer spending. Low nominal GDP growth could also mean that if the inflation rate starts rising, it could potentially pull down the ‘real’ GDP growth rate.
Merchandise exports, which have plunged for the past 17 months, remain a key concern. Declining exports seem to be determined by a decline in world demand. Gross fixed capital formation (GFCF) — a marker for new capacity additions by firms — grew at 3.9% in 2015-16 compared to 4.9% in 2014-15, while it contracted by 1.9% in January-March, mirroring subdued investment activity. That said, there are a few silver linings visible on the economy’s firmament. Eight infrastructure sectors — collectively called the ‘core sector’ — surged to a four-year high of 8.5% in April. Commercial vehicle sales also appear to be gathering speed, and the prospects of summer rains look bright as of now. All told, these could be the first early signs of an economy-wide revival.