Hoping for the best

Optimistic growth figures will complicate Budget process

On Friday, the Central Statistics Office or CSO released its first Advance Estimates of India’s gross domestic product (GDP) growth in the ongoing financial year. It calculated that GDP growth in 2016-17 would be 7.1 per cent, down from 7.6 per cent in 2015-16. Growth will be boosted, in particular, according to the CSO, by a good showing from the agricultural sector. After two consecutive drought years, in which agriculture shrank by 0.2 per cent and then grew by only 1.2 per cent, the sector is projected to post a very healthy 4.2 per cent growth this year. The first impression for many was that demonetisation would not affect the Indian economy as much as feared — but that is an unwarranted conclusion. These estimates of full-year growth are largely based on data only until October 31, 2016, and so demonetisation, which was announced on November 8, and its impact on the Indian economy, have not, in fact, been included while arriving at these figures.

Even without demonetisation’s ill-effects showing up in the data, there is more than enough to be concerned about. Most worryingly, the investment slowdown must be taken into consideration. The CSO suggests that gross fixed capital formation, or GFCF, the usual indicator for investment, will actually decline in 2016-17. It grew a reasonable 3.9 per cent in 2015-16. Even this is based on extremely doubtful assumptions. In fact, the GFCF fell by 4.4 per cent in the first half of the year, the portion for which the data are actually in. In order to project it falling by just 0.2 per cent over the whole year, the CSO has had to assume it will grow handsomely from October onward, during months in which economic activity is expected to take a significant knock because of demonetisation. Most other estimates of ongoing or planned investment are not as rosy. Data from the Centre for Monitoring Indian Economy, or CMIE, showed new project announcements were at a three-quarter low in December. A rebound will have to be extremely sharp; and, certainly, there are no signs of it in sentiment at the moment. Some have wondered if the government will be able to make up the difference. But the government has already expanded itself considerably in previous years and has limited room to spend more. In any case, public investment is dwarfed in scale by private corporate investment.

The government will have other work to do, according to the CSO estimates. In the last financial year, government expenditure grew two per cent; this year, it is supposed to grow almost 24 per cent. Though this is largely because of the outgo on account of the Pay Commission recommendations, the growth should worry watchers of the fisc. Indeed, the implications of these figures for the process of framing the Union Budget are disturbing. Traditionally, the first Advance Estimates are used as a basis for the Budget arithmetic. But this year, it will be unwise for the government to take the figures without a pinch of salt. Although the nominal GDP is indeed projected to be higher than what the Budget surmised, which would indicate some fiscal space, the effects of demonetisation and a continued investment slowdown will have to be factored into the Budget’s mathematics if it is to be considered at all credible.