This is not wishful thinking, driven by the overall
sense of euphoria. Quarterly GDP growth is measured
relative to growth in the comparable quarter of the
previous year. So, growth in January-March 2018 is bound
to look good because growth in January-March 2017 had
fallen to an abysmal 6.1%, following the disruption
caused by demonetisation. Thanks to this statistical
effect (illusion?), any growth of over 7% in the last
quarter will take GDP growth for 2017-18 above CSO’s own
estimate of 6.6% and edge closer to RBI’s more
optimistic 6.7%.
This is not wishful thinking, driven by the overall
sense of euphoria. Quarterly GDP growth is measured
relative to growth in the comparable quarter of the
previous year. So, growth in January-March 2018 is bound
to look good because growth in January-March 2017 had
fallen to an abysmal 6.1%, following the disruption
caused by demonetisation. Thanks to this statistical
effect (illusion?), any growth of over 7% in the last
quarter will take GDP growth for 2017-18 above CSO’s own
estimate of 6.6%. It may even surpass RBI’s estimate of
6.7%.
Here the good news, as of now, is lead indicators — core
sector growth of 6.7%, higher vehicle sales, better
corporate earnings — give sufficient reason to believe
the economy will clock 7%-plus in the last quarter. Is
that reason enough for chest-thumping? Yes and no.
Yes, because a close look at CSO’s numbers at a
disaggregated level suggests the three sectors that have
the maximum impact on the macro-economy — and more
directly on public well-being — agriculture,
construction and manufacturing, have all shown sharp
recovery. Value-added in agriculture has grown 4.1%, up
from 2.7% in the previous two quarters. This improvement
has come despite the dramatic upward revision in growth
rate in the comparable period last year to 7.5%, the
fastest since the new GDP series was introduced in
January 2015.
Clearly, there has been a welcome diversification of
farm activity to areas like floriculture, animal
husbandry, fisheries and dairy farming, and insulating
farm income from crop price fluctuations to some extent,
thereby reducing rural distress. Construction, another
sector in the doldrums particularly after demonetisation
and the implementation of the Real Estate (Regulation
and Development) Act (Rera) in May 2017, has clocked a
growth of 6.8%, again the highest quarterly growth in
the new GDP series.
Given that construction is highly labour-intensive, the
implications for employment and growth are positive.
Growth in value-added in manufacturing, another key
sector from the perspective of job creation, is up 8.1%,
relative to the same quarter of the last financial year
when it grew an identical 8.1%. Thus, despite the high
base of the previous year (that would normally exert a
downward pressure on subsequent performance),
manufacturing growth seems to have held out. Quite
strongly. That is not all.
Growth in gross fixed capital formation (GFCF), a proxy
for investment, grew 12% in the third quarter, almost
twice the growth (6.9%) recorded in the previous
quarter. To be sure, the share of GFCF in GDP is still
low. So, this piece of ‘good news’ must be taken with a
pinch of salt. Nonetheless, to the extent lacklustre
corporate investment seems to be a thing of the past,
there is reason to cheer. Once investment looks up,
growth must follow. That’s the conventional economic
argument. But is higher growth really a given? Not
quite.
Economists love to add a caveat: ceteris paribus — other
things remaining the same. The reality, however, is that
nothing remains the same. Not in the real world. So what
could spoil the party?
Faster-than-expected interest rate hikes by the US
Federal Reserve, higher oil prices, rising trade
protectionism, geopolitical tensions and, of course, the
monsoon. But the list of partypoopers also includes
things within our control: fiscal deficit (quantum as
well as quality), RBI/GoI action (read: regulatory
over-reach with adverse consequences for bank credit)
and monetary policy (read: excessively tight policy with
a focus on an inflexible 4% inflation target).
Unfortunately, there is no guarantee that policy
mistakes won’t scupper the nascent recovery. Remember
demonetisation and how it needlessly set the clock back
on economic recovery, and with questionable longterm
benefits? Hopefully, with general elections barely 15
months away, GoI will be more wary of rocking the boat
and will not squander this second chance to set the
economy on the path of sustained growth.
Source::: Economic Times,
dated 05/03/2018.