 "Arvind Subramanian")
A day after official data showed India’s economy grew 7.3 per cent in 2014-15, slightly lower than the advanced estimate of 7.4 per cent, Chief Economic Advisor Arvind Subramanian retains the projection of 8.1-8.5 per cent growth for this financial year. He tells Indivjal Dhasmana all the factors on which the projection in Economic Survey 2014-15 is based are valid, with a possible exception of the monsoon. Edited excerpts:
Growth in output of the agriculture and allied sectors was almost flat in 2014-15 and the sector contracted in the third and fourth quarters. Besides, merchandise exports fell for the fifth consecutive month. Do you stick to the 8.1-8.5 per cent growth projection for 2015-16?
The logic behind the 2015-16 forecast was growth would be greater in 2015-16 relative to 2014-15 by a margin greater than growth in 2014-15 over 2013-14. The reasons for that increase were lower oil prices, the cumulative impact of reforms, easier monetary conditions, less fiscal consolidation and a monsoon that isn’t as bad. All these reasons are valid, with the possible exception of the monsoon, which is still uncertain. To put it differently, if growth could pick up in 2014-15 relative to 2013-14 by about 0.6 per cent (at basic prices) and 0.4 per cent (at market prices) despite a poor monsoon and fiscal consolidation, why would it not pick up by more for all the reasons suggested above?
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I want to make a general point about some of the commentary on the recent data. Many have focused on the decline in the fourth-quarter growth (on the supply side) and talked of a growth collapse. Decline in growth is actually a seasonal pattern: in 2013-14, fourth-quarter growth (relative to the third) declined more sharply. In fact, for the entire year, GDP growth on the supply side increased more, relative to 2013-14, than GDP growth estimated from the demand side. So, for the year as a whole, the complication arising from net taxes (taxes less subsidies) worked to understate supply-side growth.
Considering the effect of unseasonal rain on rural incomes, will this come in the way of your projections?
Here, the key issue is whether for the entire year, the magnitude and distribution of the monsoon will be such that it reduces agricultural output by more than it did in 2014-15. We will have to wait and see.
Many experts have said the turnaround in industry, particularly manufacturing, does not mirror the ground reality. Manufacturing rose 7.1 per cent in 2014-15, against the advance estimate of 6.8 per cent and 5.3 per cent in 2013-14. But according to the Index of Industrial Production (IIP), it fared poorly.
In the recent data, the performance of the manufacturing segment is perhaps the most encouraging. I believe there are two reasons why these data may be reasonably reliable: IIP indicators have suggested growth of three-four per cent on an annual basis in 2014-15. But these are volume indicators and at a time when input prices are declining substantially, recall that the level of wholesale prices has declined (negative inflation) six months in a row; volume indicators could be under-stating value-added growth. The second reason is indirect tax data for April show a healthy increase in collections (9.8 per cent), stripped of all the new tax measures. On reasonable assumptions about tax buoyancy, these collections are consistent with our real and nominal GDP growth estimates for 2015-16. One indicator that suggests continuing weakness in manufacturing is, of course, corporate profits.
If manufacturing has indeed shown a turnaround, what is the need for the Reserve Bank to cut the policy rate?
While the economy is recovering, growth is still well below potential, inflation under relative control, and fiscal consolidation in place for 2015-16 (the latter is especially true when viewed from a general government perspective).
So, from a cyclical perspective, the economy could do with all the policy support it could get.
Poor credit growth does not justify 11.5 per cent growth in financial and related sectors in 2014-15, against 7.9 per cent in 2013-14. Should we take this with a pinch of salt?
While nominal credit growth has declined, real credit growth (growth adjusted for inflation) has been constant and, perhaps, even shown a slight uptick. This is also true for broader measures of financing for corporates, including non-bank sources such as bonds, ECBs (external commercial borrowings) and NBFCs (non-banking financial companies).
Do you think investment has started reviving in the economy and the private sector has started increasing investments? Data show gross fixed capital formation rose 4.6 per cent in 2014-15 compared with three per cent in 2013-14.
The increase in gross fixed capital formation in 2014-15 is encouraging. Whether this will be sustained remains to be seen. We have seen that the stalling rate of projects has declined but the question is whether new investments, both in the public and private sectors, are seeing a strong turnaround.
Private consumption expenditure rose 7.9 per cent in the fourth quarter, the most in 2014-15. With the rural economy in distress, do you think demand is that robust? Also, with the US economy contracting in the first quarter this year, do you think demand for our merchandise exports will fall for many more months?
In 2014-15, consumption growth has remained broadly stable — government consumption has declined, reflecting the sharp fiscal consolidation; exports have declined, reflecting the difficult international environment; and capital formation has increased. Going forward, headwinds on the demand side could be export demand and consumption, the latter depending on the monsoon, to an extent. But the fiscal picture will be better this year, consumption demand boosted by oil prices and easier monetary conditions. Hopefully, the pick-up in investment will be sustained, especially if public projects are implemented quickly and stalled projects resolved and accelerated.
