Advance estimates show strong domestic demand

Which of the government’s advance estimates of national income is correct? Is it the estimate of income by economic activity? Or is the projection for gross domestic product (GDP) growth by taking the expenditure estimates? At first glance, the two methods seem to arrive at rather different conclusions about the economy.

If you take GDP growth (at factor cost at constant prices) by economic activity, the advance estimate for FY12 is 6.9%, well below the 7.3% growth notched up in the first half. And if you take GDP growth by expenditure (at market prices and at constant prices) then growth for the full year FY12 is 7.5%, just a smidgen below the 7.6% achieved in the first half. There will obviously be a difference in the absolute numbers and the total growth percentages, because one of the measures is at factor cost while the other is at market prices.

But if we look at GDP by expenditure, we find that growth in private final consumption expenditure is at 6.5% for the full year, while it was at 6.1% for the first half of the year. So the second half of the year is expected to be better than the first, at least as far as private consumption growth goes. Government final consumption expenditure follows a similar pattern— growth was 3.1% during the first half, but is expected to be 3.9% for the full year. What that will do to the fiscal deficit is better left unsaid.

But here’s where the really heartening bit comes in—even gross fixed capital formation (GFCF) is expected to pick up in the second half. Data shows GFCF at 3.5% for the first half, but at 5.6% for the full year, which implies a substantial pick-up in investment during the second half. Indeed, if we assume no revisions in the numbers, then growth in GFCF during the second half is estimated at 7.5%, which incidentally is the same pace at which it grew in FY11. Since consumption demand had held up relatively well and it was investment demand that had slumped, this turnaround in investment demand, if true, is very good news. In short, if we go by the GDP estimates on the expenditure side, the economy has already turned the corner in the second half of the year.

Why then is the growth estimate for the full year lower than for the first half? Export growth is expected to be much slower, at 14.3% for the full year against a high 25.9% for the first half. Growth in imports, on the other hand, is slightly higher for the full year than for the first half, another indication of the strength of the domestic economy. The build up of inventory is expected to be a bit less in the second half, while expenditure on valuables is estimated to be much lower.

This rather upbeat picture changes substantially when we look at the GDP by economic activity. Growth estimates for the full year are lower for almost all sectors, except construction. Growth in agriculture for the full year has been taken as 2.5%, versus the first half’s 3.6%. The mining sector is expected to contract by 2.2% in FY12, against a contraction of 0.5% in the first half. Manufacturing growth in the first half is estimated at 4.9%, while it is 3.9% for the full year. That means, with all the usual caveats, that growth in the second half will be a dismal 2.8%. The other sectors also show a deceleration.

So which estimates do we go by? The expenditure data are supposed to be dodgier than the other set and they contain a big number labelled “Discrepancies”. But then the figures for industrial production are almost equally erratic, especially when it comes to capital goods.

Perhaps the difference is explained when we consider the exports of each sector. The manufacturing sector is expected to do worse in the second half probably because of lower exports. But the services sector doesn’t export much, compared to its huge size. That’s why its growth estimates for the second half aren’t that bad. “Trade, hotels, transport and communications’ are expected to grow by 11.2% for the full year compared with 11.3% in the first half. ‘Finance, insurance, real estate, etc.’ growth estimates are 9.8% for the first half and 9.1% for the full year. ‘Community, social and personal services’ also show a very slight deceleration in the second half. And construction is actually supposed to do better in the second half. In short, the services sector has proved resilient.” Combining both estimates of GDP, the message is that domestic demand is strong, but the problem lies with exports.

Are the advance estimates a good guide to the actual numbers? The estimate for GDP growth in FY11, at factor cost and at constant prices, made last February was 8.6%. That wasn’t too far from the revised figure of 8.4%. Taking the expenditure side figures, the advances estimates of GDP growth at market prices and at constant prices was at 9.7%. The revised “quick” estimates place growth at market prices at 9.6%. That too is not bad at all.

But if it is the lack of external demand that is a problem and domestic demand is strong, then, as Gaurav Kapur, economist with RBS Bank, Mumbai says, inflationary pressures from the demand side would remain high. Add to that a mere 2.5% growth in agricultural output in FY12 and the Reserve Bank of India should be in no hurry to lower interest rates.

Manas Chakravarty looks at trends and issues in the financial markets. Comment at capitalaccount@livemint.com

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