Finance Ministry somewhat closer to reality

In its monthly report for March, the Union finance ministry says the economy appeared to have slowed slightly in 2018-19. This is good news — not the slowing but the ministry recognising the reality. A departure from its state of denial and signifies the first essential step for solving a problem — admitting there is a problem.

The report identifies the proximate factors responsible as declining growth of private consumption, tepid increase in fixed investment and muted export rise.

In its February report, the ministry had said growth was consumption-driven in recent years and growth in consumption was unyielding. Its March report said that in line with declining real Gross Domestic Product growth, private consumption in the March quarter (the final one or Q4 of 2018-19) had also declined, as reflected in the drop of growth of two-wheeler sales toward the end of the year. But, it also says the expected firming-up of government consumption expenditure in Q4 of FY19 was on course, as growth in its cumulative revenue expenditure was higher in recent months.

The February report said declining investment had bottomed out, with fixed investment in FY19 increasing in proportion to GDP and that improvement in the investment rate was the most positive development, increasing by 0.3 percentage points (pp) to 28.9 per cent, and more promisingly by 1 pp to 29.5 per cent in Q3. Both the IIP (Index of Industrial Production) and manufacturing IIP had also risen in 2018-19 over their respective levels of the previous year; so did production growth of eight core industries. It also said an elevated level of both nominal and real repo rates could not deter investment demand, as commercial banks responded with higher growth of credit disbursal in 2018-19 and a lower burden of non-performing assets in the first half. 

Commercial bank credit growth in February 2019 rose to 14.6 per cent, higher than the cumulative average of the year thus far. The March report now says that though fixed investment as a percentage of GDP had been trending up since 2017-18. The trend might pause for a while, also evident in slowing of growth in non-food bank credit in Q4. So, what caused the change, when export rose 11 per cent in March and revenue from the Goods and Services Tax hit an all-time high?

Depreciation of the real effective exchange rate (REER) in 2018-19 had a limited impact on growth of export, said the February report. The March report now says REER rose in Q4 and could pose a challenge to revival of export in the near future. And, on the external front, the current account deficit as a ratio to GDP is set to fall in Q4, limiting the leakage of growth impulse from the economy.

The February report said from a low of 10.6 per cent in January, growth climbed back to double-digit at 17.3 per cent in February, reflecting a positive outlook on the economy’s prospects. The March report, however, said the economy appears to have slowed in 2018-19.  Obviously, the ministry has kept its trumpets aside and now sings a slightly different tune.

E-mail: tncrajagopalan@gmail.com