Q3FY18 GDP growth at 7.2% is not great but isn't bad either: Here's why

Private consumption growth has returned to the pre-demonetisation levels but anecdotal evidence suggests otherwise

So, in vindication of what the government has been saying, GDP during the third quarter of 2017-18 has grown by 7.2%. It had grown by 5.7% in the first quarter of 2017-18 and by 6.5% in the second quarter. 

This means growth has returned firmly to the Indian economy. The betting will now be on what it will be in the fourth quarter, and for the whole year 2017-18.

Chances are that it will be a shade over 7%, which is very good going indeed when seen in the context of the disruptions caused by demonetisation in November 2016 and the introduction of GST in July 2017. 

 

Both are now a thing of the past. 

Economists and other experts tend to blur the picture and confuse everyone by talking about very small details about which there is little clarity in the first place. We need to leave that sort of Vedic debate to them and focus on the three things that really matter: manufacturing, private consumption and revenue.

For an economy to be ticking along nicely, all three need to be increasing at healthy rates.

This is where the bad news is hiding. The growth in the manufacturing sector is around 5.1% compared to 7.9% in 2016-17.

But private consumption growth has returned to the pre-demonetisation levels. The government thinks that private final consumption expenditure during 2017-18 will be the same as it was 2016-17. The precise estimates don’t really matter very much because the measure is so imprecise.

That leaves government revenue which, when GDP is measured GVA terms (or at market prices) plays a key role. The latest revenue estimates show that this too is doing well, suggesting that the GST turbulence is now more-or-less over.

What now?

As is well known many factors influence the rate of the growth of GDP. But possibly the two most important factors are business confidence and the proximity of a general election. Neither is measurable.

Anecdotal evidence suggests that business confidence continues to be very low because of the various acts of omission (poorly sequenced reforms) and commission (tax terrorism, to name just one thing). This is clearly reflected in the anemic state of private industrial investment.

As to the general election, there are three uncertainties. One, will the NDA return to power? Two, how many seats will be BJP lose? And three, will Mr Modi continue as prime minister of the seats lost are in excess of 80-100.

For any major commercial decision, these are huge uncertainties, to cope with which businessmen are likely to wait and watch.

There is a fourth uncertainty as well – the monsoon. But its impact on GDP growth will be marginal because agriculture now contributes just about 10% to it. But a bad monsoon will increase political uncertainty. Indeed a poor monsoon can be the kiss of death for a sitting government.

So, overall, the best we can expect over the next 15 months is to jog along at around 7%, give or take a bit here and there. It’s not great but isn’t bad either.