Signs of recovery

But investment numbers are still a worry

The provisional estimates of national income for the year 2015-16, and the quarterly estimates of gross domestic product or GDP for the fourth quarter of that year – from January to March – were released on Tuesday by the Central Statistics Office of the Ministry of Statistics & Programme Implementation. The whole year’s statistic for economic growth is at 7.6 per cent, the same as was estimated in the advance numbers released in February. However, the headline-grabbing number is the estimate for GDP growth at constant 2011-12 prices for the final quarter of 2015-16, which is 7.9 per cent. Almost eight per cent growth cements India’s position as the fastest-growing large economy in the world. Notably, estimates for GDP growth in the previous three quarters have been revised slightly downward, so anything less than 7.9 per cent in the third quarter would have meant that India would have fallen short of the advance estimates of GDP growth for the full year, issued in February. Seen overall, the numbers would certainly suggest there is a growth momentum. Real growth in 2014-15 was 7.2 per cent, and in 2015-16 it was 7.6 per cent. Within the year, too, an acceleration is evident — GDP in the previous quarter, between October and December, has been revised to show growth of 7.2 per cent against 7.9 per cent in the next, final quarter.

While the headline numbers suggest that India is on a path to recovery, two important caveats remain. The first is that this release of GDP numbers continues the puzzling anomalies that have long been noted when it comes to India’s manufacturing sector growth. According to the gross value added (GVA) numbers for 2015-16, manufacturing grew at 9.3 per cent, a marginal decrease over the 9.5 per cent in the advance estimates. The private corporate sector grew at 10 per cent, according to the numbers. It continues to be difficult to reconcile these numbers with other indicators, including the results of listed companies. The anomaly is most stark when the index of industrial production or IIP is taken into account. The IIP grew at 2.4 per cent for the whole year of 2015-16 (two per cent for manufacturing), which according to the GDP calculation corresponded to manufacturing growth of 9.3 per cent. But in 2014-15, IIP grew at 2.8 per cent, faster than in 2015-16, but manufacturing growth according to the GVA estimates was only 5.5 per cent. India’s statisticians are yet to set minds at rest about the manufacturing growth puzzle.

The other caveat is about the sustainability of this growth. Sustained high growth requires high investment. But India is yet to recover the high levels of gross fixed capital formation (GFCF) seen in the boom years of 2003-08. In fact, GFCF grew at only 3.9 per cent in 2015-16, as compared to 4.9 per cent in 2014-15. This means that it is only 31.2 per cent of GDP in 2015-16, down from 32.3 per cent in 2014-15. In fact, the momentum for GFCF runs in the opposite direction to headline growth; it was 32.9 per cent of GDP in the second quarter, 29.9 per cent in the third and only 29.4 in the fourth quarter. An investment recovery is still awaited. Indeed, GFCF as per cent of GDP has shrunk for the fourth successive year, even as GDP growth has accelerated in each of the last three years. This is a puzzling trend. Overall, however, the apparent resurrection of growth will no doubt take some of the pressure off the Reserve Bank of India. If the economy is growing as well as the numbers suggest, then Governor Raghuram Rajan could well argue with some justification that there is no growth crisis at hand that requires him to compromise on his inflation-fighting and cut rates further.