Hitting the bottom

The silver lining is that growth can only improve from here

The first advance estimates for economic growth in 2017-18, released by the Central Statistics Office (CSO) on Friday, do not make a pretty picture. The CSO estimated that gross domestic product would grow at 6.5 per cent in the current fiscal year, making it the worst performance in the four years of the National Democratic Alliance government. It is just 10 basis points more than what India clocked in the last fiscal year (FY14) under the United Progressive Alliance regime. Nominal GDP growth is expected to slow to 9.5 per cent, compared to the 11.75 per cent assumed in the 2017-18 Budget.

More worrisome is the estimate for gross value added (GVA), which is pegged at a three-year low of 6.1 per cent and significantly lower than the Reserve Bank of India’s expectation of 6.7 per cent for FY18. In sum, while the economy seems to have turned around from the lows that it hit in the first quarter of FY18, when GDP growth sunk to 5.7 per cent, there is a big difference between reversing the deceleration and growing fast. That’s why at a time when the global economic revival is bringing much cheer across the developed countries and many emerging economies are seeing improvements in exports, India is struggling to ride the wave.

A look at the sectoral growth composition suggests that the deceleration, year on year, is fairly broad-based as sectors witnessing deceleration account for roughly half the GVA. In particular, both agriculture and manufacturing saw a sharp deceleration in growth over the past financial year. Moreover, services such as financial, real estate & professional services, as well as public administration and social services, are expected to see definite moderation. From the point of view of expenditure, the troublesome aspect is that private consumption, one of the key factors holding up growth in FY17, seems to be faltering this year as well. The other big factor that boosted growth in the last fiscal year was the government’s final consumption expenditure, but it has witnessed a much sharper deceleration this year. And although gross fixed capital formation, which maps private investment, has shown a considerable jump, it is being attributed to a statistical base effect, without much improvement in capital formation on the ground.

Finance Minister Arun Jaitley has put on a brave face and has argued that the economy is improving progressively. However, a lower growth rate does not help matters. The minister stares at a scenario where revenues, especially from the goods and services tax, are falling well short of expectations, even as there are growing demands from him to give some boost to the rural economy in the upcoming Budget. Not surprisingly, the fiscal deficit is under pressure. The CSO has suggested that the same level of deficit with a lower than expected growth will result in a slippage of just 5 basis points. However, most observers expect the final deficit data to be closer to 3.5 per cent of GDP, that is, at least 30 basis points more than budgeted. The only silver lining is, presuming that growth continues to improve, this estimate will not have to be revised downwards, as has become the norm lately.