Will India get back ‘fastest growing’ tag soon? Two key parameters tell different tales
Niti Aayog vice chairman Arvind Panagariya says India will regain the crown of the fastest growing major economy, overtaking China, as early as the first quarter of 2017-18.business Updated: Jul 02, 2017 07:03 IST
The debate over India’s growth story is still on, the trends in the two main gauges that measure economic activity—the gross domestic product (GDP and gross value addition (GVA)—tell different stories.
Demonetisation did crimp household spending and investment but other factors such as inflation and indirect tax receipts also played a part in affecting the two growth parameters.
Soon after government data detailed that India lost its “fastest growing” tag to China in the quarter to March, policymakers are in a denial mode that demonetisation put a spoke on the growth cycle and assert that reforms will help the economy to rebound as early as June quarter.
On Thursday, finance minister Arun Jaitley said there are several factors which affect the economic growth as measured by the gross domestic product (GDP), and India was slowing even before the demonetisation drive.
Analysts have contested the government’s claim saying there was bound to be an impact on the economy when 86% of the currency was sucked out within two months and as remonetisation picked up with a time lag.
Niti Aayog vice chairman Arvind Panagariya says India will regain the crown of the fastest growing major economy, overtaking China, as early as the first quarter of 2017-18.
Here are some of the facts that have come into play to depress the growth rates and what can revive the economy:
1.GDP versus GVA
While the GDP growth slowed to 6.1% in the fourth quarter to March 2017, from 9.2% a year ago, the GVA growth rate has fallen even steeper to 5.6% from 8.7%, CSO data shows.
Even for the full financial year 2016-17, the GDP grew by 7.1% as compared with 8% a year ago. The GVA growth slumped to 6.6% from 7.9%.
Why is this difference?
As GDP is calculated by adding the GVA and indirect taxes net of subsidies, a robust growth in tax receipts especially on fuels and metals have helped the government to show a better GDP growth than GVA.
India did not cut excise duties on petroleum products even after global crude oil prices rose by more than a third from close to $39 a barrel on early April 2016, to $53 by end of March 2017.
Similarly, the customs duty receipts on imported metals have also gone up as commodity prices have risen sharply.
Service tax rates were increased by a percentage point for 2016-17.
The Controller General of Accounts data showed excise collections were up by 33% to Rs 3.81 lakh crore while service tax was up 20.4% to Rs 2.55 lakh crore.
Some analysts are also surprised by the steep jump in government final consumption expenditure (GFCE) by 31.9% in the fourth quarter. “GFCE accounted for a substantial 2.4% of the 6.1% GDP growth in Q4 FY2017,” says Aditi Nayar, vice president and principal economist at ratings agency ICRA.
“It is unlikely that state government expenditure would have expanded at such a fast pace as to have offset the contraction in the revenue expenditure. We think that paucity of data on central and state government expenditure for the entire quarter, may have contributed to an over estimation of growth of GFCE for Q4 FY2017.”
2.Nominal versus real growth
One of the striking features in the growth numbers is the widening gap between the nominal GDP and GVA calculated at current price levels and the real matrix measured in terms of 2011-12 prices.
While the real GDP growth was estimated at 7.1% for 2016-17, the nominal growth was at 11%. Similarly, the real GVA growth was at 6.6% and the nominal growth was 9.7%.
Interestingly, the nominal GVA growth has been accelerating from 8.7% in first quarter (April-June) to 9.4% in each of July-September and October-December and finally to 11.3% in January-March.
Similarly is the case with the nominal GDP growth rate, which increased from 10.4-10.5% in the first three quarters to 12.5% in Q4.
Jaitley might be indicating to this trend when he said the economy was slowing down even before demonetisation.
“To be fair, the economy was in a slowdown mode from the second quarter of 2016-17, and only accelerated in Q3 and Q4,” Soumya Kanti Ghosh, group chief economic advisor at the country’s largest lender SBI, wrote in note.
3.Inflation played a spoilsport?
What has actually happened is that inflation started firming up especially with rise in commodity prices and pent-up demand after remonetisation, which lowered the real GVA and GDP growth all the more in the fourth quarter.
The WPI inflation, which was at 1.8% in November and 2.1% in December 2016 when the demonetisation was at its peak, climbed to 4.3% in January and 5.5% in February, as the government and Reserve Bank of India pumped in close to Rs 12 lakh crore of new notes.
The GVA deflator, which is used for adjusting the nominal growth rate for price changes, increased to 5.4% in Q4 from just 1.6% a year ago.
That was pushing up the nominal growth rates in the last quarter of the fiscal year to March 2017.
While there was no doubt that demonetisation was one of the main reasons why the growth took a hit in the third and fourth quarters, the rapid remonetisation or pumping of new Rs 500 and Rs 2,000 notes pushed up demand and prices.
4.Demonetisation and Remonetisation
After the note ban was announced, some of the labour-intensive sectors such as construction and manufacturing slowed sharply.
The manufacturing growth slowed from 8.2% in Q3 to 5.3% in Q4, while construction plunged from a 3.4% expansion in third quarter to a 3.7% contraction in fourth quarter.
Cement output, which was growing by 6.2% in October, slowed to 0.5% in November and fell in the subsequent months.
Broadly, the consumption and investment took a hit during the fourth quarter.
Private consumption as a share of GDP was at 58.7% in Q4, down from 61.6% in third quarter and 59.1% a year ago.
Investment in plant and machinery, as measured by gross fixed capital formation (GCFC), was down to 25.5% in Q4 from 27% in Q3 and 28.5% a year ago.
5.How will growth pick up this year
As the demonetisation impact fades out, the economy will gather momentum as consumers start spending and companies expand capacity.
A normal monsoon raises hope of another bumper crop this year, which will boost demand for consumer goods, cars and electronic goods.
While the government’s Economic Survey projected growth to touch 7.5%, private analysts are not so optimistic.
World Bank has recently forecast India’s growth to rise 7.2% in 2017-18.
Jaitley expects the goods and services tax (GST) scheduled to be rolled out from July will lift growth.
“The nationwide rollout of GST in the second quarter of FY18 is also expected to spur growth further, albeit marginally—an increment of 0.25% to 0.50% to the GDP growth,” said Madan Sabnavis, chief economist of Care Ratings.
Some analysts say companies could slow production in the initial months until they clear old stocks.
The purchasing managers index (PMI) shows a dip to 51.6 in May from 52.5 in April, indicating to some moderation in factory output.
There are also indications that the RBI may not cut rates at its monetary policy review on June 6-7, even though April retail inflation was at less than 3%.
Some banks have started raising their lending rates as cash piled up during the demonetisation period is now flowing out.
Still, the inherent demand from 1.3 billion people may just be enough for India to grow at over 7% in this fiscal year to reclaim the “fastest growing” crown from China.