THE government releases official data on quarterly growth of national income, with a time gap of exactly two months. On August 31, it reported that India’s GDP growth rate for the April to June quarter was a solid 8.2 per cent, well past the psychological level of 8. This was the highest growth rate recorded in the past nine quarters and makes for some good news on the economic front. Growth was much higher than an expected 7.5 per cent or 7.6 per cent, and therefore came with an upside surprise. This then became the fifth consecutive quarter of steadily rising GDP growth rate from the low of 5.7 last year June quarter. The question then is: can we sustain this 8 plus growth in the next few quarters and beyond? That looks quite challenging.
High growth is an imperative, since it means higher incomes, jobs, consumption and more fiscal resources (taxes) for the government. To sustain the growth engine at a high rate requires a balanced pace between the various drivers. We need consumption, investment and exports to grow together. These are the “demand” drivers, or as measured from the spending side. If the spending is chugging along, it signals sustainable growth. The demand drivers are also the flip side of supply side drivers, which is output from industry, services and agriculture. For sustainable growth, these need to chug along too, in a balanced way.
First let us examine the quarterly data. The high GDP growth was powered by a 13.5 per cent growth in manufacturing activity. This is mighty impressive, but the number is bolstered by the fact that one year ago the manufacturing sector actually shrank (not grew) by 1.8 per cent. Last year in June, we were still reeling from the impact of demonetisation which affected the small, medium and informal sector disproportionately. So, it is no wonder that on a year-on-year calculation, this year’s June quarter has recorded a whopping 13.5 per cent growth. This is called the “low-base” effect, and is likely to wear off in the coming quarters. Manufacturing activity is quite aligned with exports (which is foreign demand for Indian goods). Exports grew by 12.4 per cent which is a healthy number. Unless exports do well, we cannot have sustained double digit growth in manufacturing. Exports grew overall at zero per cent in the four years from March 2014 to March 2018. There are several reasons for this, such as a strong exchange rate (making exports less competitive), the disruption due to demonetisation, big delays in getting GST refunds, and inefficient logistics. If exports maintain their pace in the coming quarters, it would greatly facilitate growth in manufacturing. The fall in the rupee will help exports, although as a net importer who depends on imported crude oil, we can’t afford the rupee to fall too steeply. Industrial growth has been hampered not only by the strong rupee leading to a surge of imports, but also due to unused idle capacity which adds to fixed costs.
Looking at growth from the expenditure side, we see government (consumption) spending has been growing at a pace of 6.8, 16.9 and 7.6 per cent respectively in the past three quarters. Thus it is a major driver of providing the spending “fuel” to the GDP engine. But that spending requires fiscal resources. The fiscal situation is not comfortable, notwithstanding the record increase in income tax filers, as well as slow stabilisation of GST monthly revenues. Additional obligations like loan waivers and now disaster relief, plus capital infusion into besieged banks, mean that the government cannot continue to be the sole strong engine of growth. It did compensate for the slack in demand last year post demonetisation. The pay commission awards, the HRA revision also helps spur private (not government) consumption demand. But much of it is going toward expenditure on imported goods (from mobile phones to washing machines), causing our current account deficit to widen alarmingly.
Seeing growth from the supply side (i.e. sectoral view, or output side view) we find that the construction sector has grown smartly at 11.5 and 8.7 per cent in the past two quarters. The high growth in monsoon months is quite remarkable. Here too the hidden factor must be the strong push from the government’s roadway construction as also projects like the new capital city of Amravati, or spending on railway, ports and airports. Agriculture too grew at 5.3 per cent in the recent quarter, which is a five quarter high. Unfortunately, it does not translate into higher incomes for the farmers, since agriculture is only 14 per cent of national income, and perhaps only one third of rural income.
Ratio of investment
So we come to the issue of sustaining this high pace. Unless we get a demand push from private investment spending (not just government spending on infrastructure), and also exports, we will find it difficult to remain above 8 per cent. That ratio of investment to GDP has been falling for many quarters, and is hampered by high idle capacities, surge of imports discouraging expansion of domestic capacities, high interest rates, difficulty of land acquisition and the still difficult ease of doing business. This sounds like a list of the usual culprits. The insolvency process is helping unlock bank funds from bad loans, and will help fresh credit flow, and help increase private industrial investment.
On the export front, it won’t do any good to become protectionist. By raising import barriers we only encourage inefficiency in domestic industry. Lesser the barriers, the more it helps encouraging enterprises, especially small and medium enterprises, to be a part of global value chains. The weaker rupee too will help. Zero rating exports in GST will be a big boost. Getting exports to grow at a steady double digit is an imperative to ensure 8 plus growth rate.
India faces four adverse macro factors in this fiscal year. Inflation is higher due to oil and commodity prices, determined internationally. Current account deficit is higher due to the import surge, supported by domestic consumers. This deficit needs foreign investment inflows into the stock market to compensate. The fiscal deficit is going to be higher, especially at the state level, thanks to unbudgeted new obligations. And finally interest rates are inching higher, due to tightening liquidity and inflationary concerns. So, all in all, we should consider it fortunate if our growth rate sustains at 7.5 for the rest of the year. That would be a good achievement, especially if it is balanced across all sectors, whether seen from the demand or supply side.