The 8% growth mirage

NITI Aayog vice-chairman's estimate fails to convince

The vice-chairman of the NITI Aayog, Arvind Panagariya, said last week that India was on its way to 8 per cent growth and would likely clock 7.5 per cent growth over the course of 2017-18. While he acknowledged job creation was a challenge, he said that as the last quarter of the year approached, the economy would begin to touch 8 per cent growth. This evaluation seems to be unduly optimistic, given the multiple shock-waves the economy has been exposed to in the recent past.

Consider, first, the impact of agriculture. Growth numbers in the second half of 2016-17 were better than otherwise because agricultural output grew handsomely. This came after two successive years of drought. This year, too, the monsoon seems like it may be normal in the aggregate, though there will be regional variations in the pattern that may cause distress and alter farm output unpredictably. Yet, what is worth noting is that the high base effect means that year-on-year growth numbers will not be as flattering as they were in the previous fiscal year. 

What of the other sectors of the economy? The industrial side of the economy continues to suffer from low investment. Growth – and in some quarters, impressive growth – was managed by this sector in the past nevertheless, thanks mainly to cost-cutting and the consequent effect on value added. But in the absence of an investment pick-up, sustained industrial growth is too much to ask for. This should be clear from the June 2017 growth in eight core industrial sectors, which, according to data released on Monday, stood at 0.4 per cent year-on-year. The Index of Industrial Production has a reputation for being limited and volatile, but the fact that the last IIP print showed year-on-year growth of 1.7 per cent can hardly be a sign of a robust and recovering industrial sector. And this is the new IIP series, which has shown more upward sensitivity overall than the previous series. Whatever the view on the IIP being used as a high-frequency indicator, the fact is that it has stayed at low levels for a considerable period of time, particularly the sub-indices dealing with consumer durables and capital goods. This tells its own story of an industrial sector that will struggle to be the engine of growth.

As for the services sector, it is far from clear how the economy – which is barely emerging from the trauma of demonetisation – will react in the medium term to the introduction of the goods and services tax (GST). While there is every reason to hope and expect that the GST will be growth-positive in the long run, few expect that the transition will be costless and friction-free. These costs might well show up in growth numbers in the coming quarters. Given the complexity of the economy, and the wide-ranging and unpredictable effects of a transition as deep as that required by the GST, making short- or medium-term predictions of its effect on a services sector that still has a large informal component is a chancy business. This increases the uncertainty as the services sector has always been the fastest growing segment of the economy. So at this point, hopes of a recovery to 8 per cent growth towards the end of the fiscal year may not find many takers.