For a few quarters, take all year-on-year (y-o-y) growth figures about the Indian economy with a pinch of salt. That’s because they will now be boosted due to the favourable effect of a low base. Since demonetisation and the introduction of the goods and services tax (GST) led to a downturn in the economy, y-o-y numbers will now show high growth.
For example, the 6.4% y-o-y growth in gross value added (GVA), at constant prices, projected by the Central Statistics Office (CSO) for the second half of FY18 looks good, compared with 5.8% GVA growth in the first half. But is it really a big improvement? The 5.8% GVA growth in the first half of FY18 came on top of a 7.2% growth in the first half of FY17, while the 6.4% growth came on top of a plunge in growth to 6.1% in the second half of FY17. So the recovery projected by CSO in the second half is below expectations, which is why several economists are saying it’s likely to be revised upward. What the CSO’s estimates indicate is that the economic recovery is going to be a shallow, U-shaped one.
What else do the CSO estimates say?
Growth in ‘trade, hotel, transport, communication and services related to broadcasting’ sector is estimated to slow in the second half, compared with the first half, in spite of a favourable base effect. Also, growth in the ‘financial, insurance, real estate and professional services’ group hasn’t gone up by much, compared with the hugely favourable base effect. This suggests private sector services will remain sluggish in the second half of the current fiscal. That fits in with data from the Purchasing Managers’ Index (PMI), which show the recovery in services is far slower than that in manufacturing.
Growth in the ‘public administration, defence and other expenses’, or the government part of GVA, is estimated at a massive 11% at constant prices in the second half of the current fiscal year, well above the 9.1% growth in the first half. There’s no base effect in this group. That means government expenditure is still propping up growth, perhaps as states implement the Pay Commission recommendations for their employees.
Indeed, government expenditure has been supporting growth since 2016-17, helping to cushion the economy from the disruption inflicted on it by demonetization, the GST and the Real Estate (Regulation and Development) Act. The chart shows growth in non-government GVA (Total GVA less ‘public administration, defence and other expenses’) this fiscal year is estimated by CSO to be barely above the growth in 2012-13 and well below that in 2013-14. For the second half of FY18, non-government GVA growth is projected at 5.8% y-o-y.
What are the factors that will affect growth? Higher crude oil prices are an obvious headwind, while the tailwinds are higher consumption as the states implement pay revisions, higher exports as the world economy strengthens and a pick-up in investment demand as business optimism recovers. What do CSO’s advance estimates tell us about these factors?
Exports of goods and services are predicted to grow 4.5% in 2017-18, the same as last year. But export growth is expected to spurt to 7.6% in the second half of FY18, compared with a mere 1.2% growth in first half. So the growth in exports due to stronger global trade has been taken into account.
Growth in imports in the second half has been pegged at 17%, well above the growth of 10.4% for the first half. But the drag on GDP from negative net exports will be lower in the second half than in the first.
What about investment demand? Growth in gross fixed capital formation is projected to rise to 5.9% in the second half of the current fiscal, compared with 3.1% in the first half. But the base effect is at work here, which should temper the optimism and which ties in with anecdotal evidence about the sluggishness of investment demand.
Private consumption growth in the second half decelerates sharply in the second half, according to the CSO’s predictions, but there’s a large amount under ‘discrepancies’ in the GDP figures, which will at a later date be distributed among the various heads; so, it’s rather pointless to read too much into the expenditure numbers.
The Reserve Bank of India (RBI) had, in its last monetary policy report, projected real GVA growth at 7.1% in Q3 and 7.7% in Q4 of the current fiscal, a far cry from the 6.4% growth predicted by CSO for the second half. That should normally have called for a re-think on the central bank’s part about its monetary policy stance. But at the moment, uncertainties abound. The fiscal deficit is under pressure, crude oil and commodity prices are strong, and the government will probably give a boost to farm prices before the next general election. These factors will prevent RBI from easing policy further and, like many economists, it may disagree with CSO about its growth predictions.
As for markets, they are already looking at FY19 and FY20 earnings growth in order to justify stock valuations. In the current environment, while CSO’s growth estimates will be a disappointment, it will very likely be explained away soon as the market tries to find new and innovative reasons to extend the rally.