At first blush, the latest data for economic growth fails to excite. Gross domestic product (GDP) growth in the fourth quarter of fiscal 2013 was 4.8%. That the economy has remained stable in the 5% range for five quarters now is about the only consolation.
But the data also shows that important changes in the nature of economic growth have sustained for three consecutive quarters, which creates a favourable setting for growth to pick up in the next few quarters. In fact, combined with the upturn in other structural and cyclical parameters, the relevant questions now are how quickly growth recovers and what will be its pace.
First, the latest GDP data shows a promising switch in spending, notwithstanding data quality. Decelerating public consumption is yielding to a modest rise in private business spending; although very feeble, the pace of gross fixed assets creation has held at an average 3.3% for three quarters now. This shows the economy is rebalancing in the right direction.
Two, the GDP deflator, which is the broadest measure of inflation, fell more than a percentage point relative to the previous quarter. Given the trend in wholesale and retail inflation indicators, this trend will sustain in the current quarter too; a forward-looking lead is the just-released manufacturing PMI by Markit for May, which showed a sequential decline in both input-output prices of more than two points each.
There is a fundamental healing as two of India’s three macroeconomic problems are on the mend. Inflation is off its peak and appears to be in a secular decline. Two, fiscal balances are improving, with the key deficit indicator for 2012-13 lower at 4.9% of GDP against the earlier estimate of 5.2%. Though it is early days yet, a 30 basis point fiscal consolidation could well be the first hint of a larger fiscal correction in 2013-14.
Cyclical metrics such as fourth-quarter corporate results contain some promise. Private corporate investment, for instance, could grow after the rise in net profits of firms thanks to lower input prices, which directly translates into an improved corporate earnings outlook. Initial public offerings are reviving, indicating improved sentiment and liquidity. The cyclical setting—inflation and interest rates off their peaks, continued softness in oil and commodity prices, further decline in interest rates, still-ample global liquidity—is immensely favourable too.
Given the confluence of positive news from the structural and cyclical data, you could argue the economy is at an inflection point. Exports could impart some impulse: the May PMI, which was otherwise at a 50-month low, showed export orders rose 2.9 points in a second consecutive monthly increase. Exports correlate strongly with gross fixed capital formation and India’s manufacturing sector, where the bulk of investment takes place, is highly export intensive. A lot therefore depends upon external demand.
As for policies, it is exchange-rate stability that deserves more attention at this point than government policy action, both for the sake of exports and because the third macro problem—the current account deficit—endures.
Renu Kohli is a New Delhi-based macroeconomist; she is currently lead economist, DEA-Icrier G-20 research programme and a former staff member of the International Monetary Fund and Reserve Bank of India.