GDP data points to a serious slowdown

Clears the confusion about the real health of Indian economy

For the second time in a row, economic growth data released by the Central Statistics Office (CSO) on Wednesday have surprised everyone. On the face of it, there was not much change in the full-year provisional estimates for gross domestic product (GDP) and gross value added (GVA) for the previous financial year (2016-17). The Second Advance Estimates released by the CSO in February pegged GDP growth at 7.1 per cent and GVA growth at 6.7 per cent. In that regard, the latest estimates, after incorporating the fourth-quarter data — GDP at 7.1 per cent and GVA at 6.6 per cent — do not point to any appreciable change. But the surprise came in the form of the fourth-quarter data, which showed that GDP growth had decelerated to 6.1 per cent. This is almost a percentage point lower than the provisional estimate in the last quarter and much lower than the estimates made by several analysts who were perhaps expecting a statistical bump-up in growth. A look at the GVA — which fell by 110 basis points over the previous quarter to 5.6 per cent —  showed that the slowdown was broad-based. Barring agriculture and government expenditure, all sectors, especially manufacturing, construction and financial services, decelerated significantly. 

The overall annual GDP growth of 7.1 per cent then is essentially held by upward revisions in the previous three quarters. But the policymakers would be ill-advised to look at only the overall figure to draw a sense of comfort. That is because they do not show the extent of slowdown in the private sector of the economy. If one looks at the GVA growth data without the impact of the government sector and the agricultural sector in 2016-17, GVA growth has decelerated from 8.4 per cent in the first quarter to 3.8 per cent in the fourth.  The flip side of this story is the GVA growth in the government sector has gone up from 8.6 per cent in Q1 to 17 per cent in Q4. But none of this hides the central message of the latest growth numbers: Starting April 2016, the Indian economy had started decelerating and this process was accentuated in the second half of the year, crucially after the government’s decision to demonetise 86 per cent of the currency — a move that shook the already beleaguered economy. Both gross fixed capital formation and private consumption as a percentage of GDP slowed down to 28.5 per cent and 57.3 per cent, respectively, in the fourth quarter when compared to the third quarter.

To a great extent then, the latest data reduce the sense of confusion about the true health of the Indian economy. For a while now, government data as well as anecdotal evidence were presenting a mixed picture of the economy. In particular, the Q3FY17 GDP data surprised everyone since the economy seemed to have weathered the jolt of demonetisation without a significant enough drop in economic activity. Yet, other data points such as credit growth, which is still at a multiple decade low, and weak private investment pointed to a very different economy. The growth data is now in line with the weakness in inflation data, especially core inflation. Both the larger story and the sectoral break-up leave the Reserve Bank of India and the monetary policy committee with little option but to consider a rate cut.