Reversal in trend

Economy seems to have shaken off note ban, GST effects

The headline number provided by the Central Statistics Office in its first estimates of economic growth in the July-September quarter provides a welcome reversal of trend. Gross domestic product (GDP) at constant 2011-12 prices has grown by 6.3 per cent in the second quarter of 2017-18 over the figure reported for the corresponding quarter of 2016-17. In the previous quarter, between April and June this year, GDP growth was 5.7 per cent. Output growth has been declining, according to CSO estimates, since the January-March 2016 quarter. The reversal of this multiple-quarter slowdown suggests that the economy has put behind it the short-term pain inflicted by demonetisation and the introduction of the goods and services tax, or GST. Growth aside from agriculture and public expenditure has been considerably stronger than in the previous quarter. This means that transitory effects are over, and structural pushes and constraints are now central to the future trajectory of Indian GDP. Hopefully, in the coming quarters, the government’s timely adjustments to the GST mechanism will aid a further recovery of growth.

Closer analysis of the data shows that much of the push to GDP growth in this quarter has come from manufacturing, the gross value added (GVA) of which grew at 7 per cent, year on year, in the recently completed quarter, as opposed to 7.7 per cent in the equivalent quarter a year ago. Manufacturing GVA had grown at 1.2 per cent, year on year, in the April-June quarter. This increase in year-on-year growth may also indicate the effect of restocking after the implementation of the GST. The contribution of stockholding to final GDP expenditure posted 6.7 per cent year-on-year growth in the second quarter, which should be compared with the 1.2 per cent it grew in the previous quarter. 

However, some methodological questions should be highlighted, as they are reason to take the new GDP numbers with a pinch of salt. The introduction of the GST was a major structural break for the Indian economy, and thus for data collection and analysis. Growth in the trading sector, for example, has been estimated in the current GDP series by examining increases in sales tax receipts. This comparison was not possible for the CSO to make between the July-September quarter and the April-June quarter. Hence the government’s statisticians used other methods to estimate it, such as looking at the increases in tax revenues from petroleum-related products (which are outside the GST) and in the nominal value of commodity output. Given that global trends in such prices have been upwards, the trade sector numbers may only imperfectly reflect underlying reality. Since trade has been the biggest contributor to growth, with GVA growth clocking in at almost 10 per cent, year on year, the overall growth estimates should be viewed with a corresponding degree of caution. 

The most worrying indicator, however, is that structural headwinds for high growth continue to be visible in the data. Exports’ contribution to GDP continued to be anaemic, growing at the same 1.2 per cent registered in the previous quarter. And the investment crisis has not moderated appreciably. While it is true that the contribution of fixed investment to GDP grew faster than in the previous quarter – at 4.1 per cent against 1.6 per cent – as a proportion of GDP gross fixed capital formation has declined, at 26.4 per cent as opposed to 27.5 per cent in the previous quarter. In spite of the modest signs of recovery, much more work remains to be done.