Trapped in a range

Growth estimates between despondency and elation

The quarterly estimates of gross domestic product (GDP) for the July-September period were published on Monday. They indicate that, measured in terms of aggregate expenditure, GDP grew year-on-year by 7.4 per cent, slightly faster than the seven per cent recorded in the previous quarter. This small acceleration did not do very much to the distribution of expenditure across different categories; one slightly reassuring change was the increase in the investment-GDP ratio to 30.1 per cent from the 29.8 per cent of a quarter ago. But, looking back over the past few quarters, the investment rate appears to have firmly settled into a narrow range of around the 30 per cent mark. This is hardly consistent with aspirations for growth to cross the eight-per-cent mark, let alone reach nine or 10 per cent. By a rough rule of thumb referred to as the incremental capital-output ratio, the investment rate needs to be well above 35 per cent to support those growth rates. Looking at the production side of the equation, now labelled Gross Value Added (GVA), that aggregate also grew at 7.4 per cent; but some sectors did particularly well, with manufacturing growing at over nine per cent year-on-year. Trade, hotels, transport and communication services and financial services also pulled their weight. However, agriculture appears to have also settled rather firmly into a narrow range, growing by 2.2 per cent in the latest quarter, similar to its performance over the past few quarters. These estimates take the first half growth rate of both GDP and GVA to 7.2 per cent, somewhere mid-way between despondency and elation.

One significant aspect of the estimates is the unusual direction of difference between the real and nominal estimates - the former being measured at constant prices, while the latter are at current prices. Nominal GDP grew by six per cent during the quarter, while nominal GVA grew by a mere 5.2 per cent. This largely reflects the decline in commodity prices over the year and, consequently, is not going to be a persistent phenomenon. It will certainly reinforce concerns about deflation, fuelling demands for stronger monetary stimulus. But, that would be an inappropriate interpretation; since commodity prices have largely stabilised, the base effect of this year will fade away and the nominal rates will return to their traditional position of being somewhat higher than the real rates.

From the policy perspective, a sharp acceleration in growth would have provided a stronger rationale for the Reserve Bank of India maintaining the status quo on policy rates on Tuesday, as is widely anticipated. This range-bound nature of growth intensifies the monetary policy dilemma. But, the more important signal from the estimates is that investment activity is just not reviving, be it interest rates or any other factors that may be deterring it. Two other factors to which this lack of vigour has already been attributed are the infrastructure deficit and the sluggish global economy, reflected in large excess capacities, particularly in China. There is little that the Indian government can do about the latter, but it certainly can do a lot to accelerate infrastructure investment. On this initiative rest the prospects of a revival in private investment and, in turn, an acceleration in growth.