By totting up a third quarter (Q3) GDP growth rate of 7.2 per cent, the Indian economy seems on course to record a growth of 7.5 per cent or more in 2018-19, as predicted by the Economic Survey 2018-19. The most encouraging aspect of the CSO’s Second Advance Estimates, which suggests that the turnaround from the Q1 trough of 5.7 per cent growth is for real, is the 12 per cent growth in real gross fixed capital formation in Q3, against 6.9 per cent in Q2. This figure suggests a revival in private investment, apart from government spending on roads and infrastructure. The core sector index for eight infrastructure sectors lends credence to the revival story, by recording a growth of 6.7 per cent in January, led by a spurt in the output of cement, steel, electricity and refinery products. This chimes with the finance ministry’s claim that “manufacturing (8.1 per cent in Q3) and significant acceleration in construction (6.8 per cent in Q3) mark a turnaround in the country's economic growth momentum”. The economy would seem to have weathered the twin shocks of demonetisation and more so GST, as claimed by the chief economic advisor, with Q3 marking a distinct break from the previous two quarters. Yet, due to the slowdown in the first half of 2017-18, GDP growth is expected to end up at 6.6 per cent for the current fiscal, against 7.1 per cent in 2016-17 and 8.2 per cent in 2015-16.
The question, of course, is whether this uptick is fickle or sustainable. There is an inexplicable deceleration in private spending, the largest component in GDP. Anxieties stem from higher oil prices, rising global interest rates owing to the Fed possibly hiking rates three or four times in 2018, and, of course, the behaviour of the monsoon. The accumulation of ‘valuables’, from 1.3 per cent of GDP in 2016-17 to 2.1 per cent in 2017-18, amounts to a diversion of savings to unproductive ends. Bank lending is back to double-digit growth levels, but whether this is because of a low base or whether it reflects a genuine increase in investor interest is a moot question. Above all, exports, which account for 20 per cent of GDP, are plagued by tax refund issues, post-GST.
While India has done well to move up 30 ranks in the ease of doing business index, the Centre must sort out infirmities in banks’ governance processes. Banks have been harsh on farmers and MSMEs, and lax on large borrowers. Farm growth numbers do not reflect the demand constraint in rural India. An election year may lead to rural spin-offs, but the fact is that the economic growth is largely driven by a clutch of services such as the financial sector, trade, hotels, transport and information technology. It must be kept in mind that GDP data does not fully capture informal sector developments, even as GST has expanded the ambit of the formal economy. The latest feel-good effect should be tempered by these sober truths.