Full-year GDP growth estimated at 7.6%

Rides high on manufacturing; but Q3 growth falls to four-quarter low

India’s economic growth for the financial year 2016 has been estimated at 7.6 per cent as compared with the revised estimate of 7.2 per cent in the previous year, aided largely by growth in the manufacturing sector.

If the new projection materialises, India will be the fastest growing major economy in the world, overtaking China.

The latest projection is a shade better than the finance ministry’s earlier estimate of seven to 7.5 per cent.

However, the GDP growth for the third quarter of this financial year slowed to a four-quarter low at 7.3 per cent. In the second quarter, it had grown by 7.7 per cent.

Growth in gross fixed capital formation, a proxy for investment, fell significantly in the third quarter, compared to the second, because of lacklustre private investments.

According to data, growth figures were revised sharply upwards for the second quarter from 7.4 per cent; and from seven per cent to 7.6 per cent for the first quarter.

 

To meet the revised figure of 7.6 per cent growth in the entire current year, the GDP has to increase by 7.8 per cent in the last quarter.

Economic Affairs Secretary Shaktikanta Das attributed the estimated higher growth to reforms initiated by the government.

However, very few economists and market experts were ready to take the official data at face value, which they said was at odds with weak exports, railway freight, cement production, investment and flat order books that pointed to weakness in the economy. “All our qualitative and quantitative data checks suggest that GDP growth decisively decelerated in FY16 as compared to FY15, whilst the GDP data is suggesting that growth accelerated in FY16,” said Ritika Mankar Mukherjee, economist, Ambit Capital.

In nominal terms, however, GDP would grow just 8.6 per cent in the current financial year, which would make the fiscal consolidation exercise of the government a tad challenging.

At Rs 135.67 lakh crore GDP, fiscal deficit at 3.9 per cent means Rs 5.29 lakh crore. This is over 26,000 crore less than Rs 5.55 lakh crore estimated at the time of the Budget.

The Budget had assumed the nominal GDP growth at 11.5 per cent.  The Centre’s fiscal deficit already stood at Rs 4.88 lakh crore till December of the current financial year.

The government will have to restrict it within Rs 41,000 crore (Rs 5.29 lakh crore minus Rs 4.88 lakh crore) in the January-March period. For the next financial year, the government will have to just narrow the gap between the expenditure and the revenue, by over Rs 13,000 crore to retain the target of 3.5 per cent of GDP on the assumption that, in nominal terms, it would also grow the same 8.6 per cent in 2016-17.

This should not have been a problem for the government, caught in a dilemma of sticking to the fiscal consolidation road map or deferring it by a year more. However, the government will have to bear the extra burden of Rs 1.1 lakh crore to implement One Rank One Pension for retired Army personnel and the Seventh Pay Commission recommendations. If the government sticks to the plan, the Reserve Bank of India will find it easier to cut the policy rate to spur economic growth.  

Chief Economic Adviser Arvind Subramanian said agriculture has to be a focus for policy action.

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India's economic growth in in recent quarters (% Y-o-Y)