National accounts data for the June 2016 quarter showed a sharp slide in gross domestic product (GDP) at market prices. This came in at 7.1% compared to 7.9% the preceding quarter and 7.5% a year ago. The more reliable measure showed that the dip was less blunt, but a deceleration nonetheless: gross value added (GVA) at basic prices slowed to 7.3% against 7.4% in the March quarter, marginally above last year’s 7.2%. While a one-quarter deceleration—most are reluctant to describe it so, sticking to ‘recovery’ instead—ought not to be too much of a concern by itself, it is the poor growth quality and visible lack of any driver that can push the economy forward that is concerning. The key underlying message is that public capex support is unable to address the aggregate investment decline even as fiscal spaces narrow and consumer spending slows.
Minus the boost from government spending which grew at 12.3%, and net of this driver, GVA growth plunged sharply to 6.7% against a decent 7.6% in the March quarter. The composition of aggregate demand is none too healthy: the robust government consumption was driven by an 18.8% growth in subsidies, while all other elements slowed. Private consumption softened to 6.7% (8.3% previous quarter), raising questions if the year-long strength is finally beginning to ebb.
What is of real concern, however, is the contraction in fixed assets of -3.1%. This deepened further from last quarter’s -1.9% and is in a persistent decline since September 2015 when government capex rose to 9.7%. From a growth outlook perspective, the important point here is that public capital expenditure—where policy efforts have focused on, these last two years—is unable to bridge the shortfall in aggregate investment, that is, stimulate private business spending.
With these indications from growth data, it’s easy to understand why many growth-hopefuls are heavily reliant upon a monsoon-cum-wages booster shot to rural and urban consumption, in the next few quarters. But economies do not become any bigger without fresh capital formation; consumption can only be a temporary bridge.
What then, will pick up the growing slack in demand? What are the prospects for public capex support ahead?
Into the next quarter, fiscal space for capital expenditures is likely to shrink more. For one, subsidy-driven consumption helped consume 61.1% of the year’s fiscal deficit target in the first quarter itself; this calls for prudence and discipline in spending ahead. Payouts for salary revisions are to follow next, pronouncing the tilt towards current expenditure and narrowing the fiscal room for capital spends. That leaves the public sector undertakings as the only entities to fill the investment shortfall. Quick action in awarding projects, giving out contracts is therefore, required for growth support in the coming months. The recent flurry of activity in the railways segment indicates the government’s thought pattern in this context. The hope is that there is private appetite for the business opportunities created and financing needs are met.
Renu Kohli is a New Delhi based economist