Growth deceleration

Advance estimates of GDP growth disappoint

The Central Statistics Office (CSO), which released the first advance estimates of economic growth on Monday, expects gross domestic product to grow at 7.2 per cent for 2018-19. While this is an improvement over the 6.7 per cent growth in the previous year, the estimate has come as a disappointment because it is below the expectation of most institutions mapping the Indian economy. For instance, both the Reserve Bank of India as well as the International Monetary Fund expected the economy to grow by 7.4 per cent this year. Even the Union finance ministry expected a growth rate of 7.5 per cent for the current fiscal. To be sure, the CSO’s figures are just the initial estimates and a more robust set of numbers will be released in February-end; yet they are significant as they will provide the foundation for the preparation of the interim Budget on February 1. 

The most significant aspect of the latest estimates is the clear deceleration in the growth momentum. The first half of the fiscal witnessed a respectable growth rate of 7.6 per cent. But that’s only half the story. GDP growth rate, in fact, dipped sharply from 8.2 per cent in the first quarter to just 7.1 per cent in the second quarter. A full year growth of 7.2 per cent implies that the CSO expects economic growth to drop to just 6.8 per cent in the second half of the year, which corresponds to the last six months of the current government’s tenure. This clear dip is seen in most sectoral estimates. For instance, manufacturing is expected to grow at 8.3 per cent in FY19, sharply higher than the 5.7 per cent in FY18. But it is expected to slow down sharply from 10.3 per cent in the first half of the year to just 6.4 per cent in the second half. Similarly, on the expenditure side of the national income accounts, estimates suggest that while both private and government consumption will moderate, it is the gross fixed capital formation (or investments) that will rise sharply in the second half of the year. 

While a rise in the rate of investments from 7.6 per cent a year ago to 12.2 per cent in 2018-19 is welcome news, it is arguable whether the increase in investments will necessarily sustain as new projects tend to be held up before a general election. It is also possible that even these estimates have an element of overestimation. After all, data compiled by the Centre for Monitoring Indian Economy showed a fall in investment projects being completed, as well as a 30 per cent drop in new investment projects taken up between December 2016 and 2018. What could drag down growth in the second half is the government’s inability to come up with economic boosters as fiscal deficit in the first eight months of the year has crossed 112 per cent of the full-year target.

Overall, there is indeed some merit in the government’s optimism (Economic Affairs Secretary S C Garg has described the advance estimates as “very healthy”) as India remains the fastest-growing major economy in the world. No one can also deny that the average figure of 7 per cent-plus growth is good news as it indicates that the economy has put behind it the pangs of demonetisation and the rollout of the goods and services tax. But it is the secular deceleration that is the worry.