A steady recovery: Manufacturing, investments help buoy economic growth

The provisional estimates of annual national income for 2017-18, released yesterday by the Central Statistics Office, confirm the widely held belief that the Indian economy is on a slow but steady path of recovery after the twin shocks of demonetisation in November 2016 and the launch of the goods and services tax (GST) eight months later. Gross value added (GVA) at basic prices grew by 6.5 per cent in 2017-18, slightly higher than what the second advance estimates had put out earlier in February. This still makes the 2017-18 figure the lowest in all the four years of the Narendra Modi government. But the trajectory of growth captured in the quarterly GVA numbers unmistakably establishes a clear recovery trend. To be sure, the upward revision of the 2017-18 figure was largely due to the fourth-quarter numbers , which estimated GVA growth in the January-March period at 7.6 per cent, the highest level reached in the last seven quarters.

Four sectors contributed to the uptick in the fourth-quarter numbers for 2017-18. Agriculture came out with an impressive figure of 4.5 per cent, overcoming the high-base disadvantage of the last quarter of the previous year. What boosted the agriculture number was the use of the third advance estimates of crop production released by the ministry of agriculture, which were higher than those put out in the second advance estimates. Manufacturing at 9.1 per cent was the highest in the last seven quarters. Helped as it was by higher corporate earnings, its performance is indicative of how the effect of demonetisation has worn off and the pain of transition to the GST regime has been absorbed by businesses. Another sector that bounced back in the fourth quarter was construction, which at 11.5 per cent, reflected the positive outcome of the pick-up in the government’s road-building programme.

The biggest contribution to the improved numbers in the fourth quarter came from public administration, which broadly corresponds to government spending. Over a 16.4 per cent growth rate in the last quarter of 2016-17, public administration again clocked a 13.3 per cent rise in January-March of 2017-18. The sectors that disappointed include mining and trade. Both of them showed little improvement. This is no surprise. The absence of a sustainable regulatory framework for the mining sector has seriously undermined it, just as exports continue to suffer from woes over GST refunds.

Gross fixed capital formation, which indicates the investment rate in the economy and is the key to sustaining growth, has also maintained a healthy trend. For the second successive quarter, it grew as a per cent of gross domestic product (GDP). At 31.4 per cent of GDP for 2017-18, it still has some catch-up to do, but its steady, though slow, rise since 2016-17 is comforting for the economy’s growth prospects.

For the Reserve Bank of India, however, which is to review the monetary policy next week, the national income numbers for the full year will present a new set of challenges. Inflationary pressure in the economy has not yet subsided. Financial outflows in the last several weeks have complicated the risks. With the improved numbers on economic growth for the last year and the continuing risks of inflation and financial outflows, the RBI may have to look at its options afresh.