Revisit overdue reforms

Loss of growth momentum in latest numbers

Belying the expectations of some optimists, the numbers for gross domestic product or GDP in the first quarter (April-June) of 2015-16 indicated that economic growth is possibly plateauing. Although GDP (now measured as final expenditure) grew by seven per cent year-on-year, compared with the 6.7 per cent recorded in the first quarter of 2014-15, this was half a percentage point slower than for the whole of 2014-15. It is entirely possible that the coming quarters will show some acceleration, but for the moment, there is a loss of momentum relative to the second half of 2014-15. Further, it is striking that this appears to be spread across virtually all sectors; the only one that grew faster than it did in the first quarter of last year was the omnibus trade, hotels, transport, communication and broadcasting, which clocked 12.8 per cent compared with 12.1 per cent last year. Agriculture and manufacturing decelerated, while electricity, gas and water slowed significantly. Looking at it from the expenditure perspective, the share of gross fixed capital formation in GDP declined from 30.4 per cent to 29.8 per cent over the year. This means that investment grew by less than five per cent, hardly a sign of a consolidating recovery.

The main reason for optimistic expectations was the impact of sharply lower energy prices and stable food prices (the onion problem began in the current quarter) on increased discretionary spending by consumers. This was seen as increasing demand for both manufactured goods and services, giving a boost to growth. As it turned out, consumption spending grew by 7.4 per cent, validating the hypothesis, but not providing enough of a boost to demand to accelerate the overall growth rate. It barely increased its share of GDP from 58.5 per cent to 58.7 per cent. Going forward, with global energy and commodity prices expected to remain moderate and the prospects of a surge in domestic food prices receding, current onion prices notwithstanding, a consumption-based recovery is still very much in play. However, the signs of a strong investment revival are nowhere as positive. Domestic infrastructure issues have been a deterrent for long. To this will be added the heightened global uncertainty emanating from the turbulence in China. Indian exports have been declining steadily for almost a year now; it is hardly likely that they will change course in the current global conditions. In short, the balance between growth drivers and hindrances appears to be rather delicately poised. Things could go either way.

This is unquestionably a disappointing outcome for all concerned. For the government, in particular, it brings home just how important it is to be reinforcing growth drivers all the time. Every setback, every retreat from executing structural reforms creates space for growth-retarding forces to consolidate. Of course, very little can be done about global upheavals other than to put protective buffers in place. This has been done by a combination of a sharply lower current account deficit and the build-up of foreign exchange reserves. But, frustratingly slow progress on infrastructure, taxation and improvement in business conditions prevents this from being leveraged into a domestically driven growth acceleration. Both global conditions and the first quarter numbers point unmistakably to the need to revisit the reforms drawing board.