The new data on the Indian economy released by the government on Tuesday provides further evidence that India is seeing a strengthening economic recovery led by consumption. The story of improved momentum fits well with other recent private sector data on passenger car sales, cement dispatches, corporate profit margins and power production. The advance estimates of crop production too have been surprisingly strong.
Headline economic growth has accelerated in the three months to March to 7.9%. In fact, it is one of the highest rates of quarterly growth in recent years. Only the growth performance in the second quarter of fiscal 2015 was better.
The improved indicators of consumption are undoubtedly welcome, but investment activity continues to be weak. The reasons are well known: stressed corporate balance sheets, low utilisation of existing capacity and fragile business confidence. Gross fixed capital formation in fiscal year 2016 is actually growing at a slower pace compared to the previous year. The upshot: The stuttering investment cycle continues to be a harsh reality. Foreign demand also continues to be weak because of the fragile global economy.
A lot thus continues to depend on consumer spending as well as public investment by the government to keep the recovery on track. The coming monsoon will naturally be a key factor in terms of consumer demand, especially in the rural areas.
Policy makers are often more interested in looking at the trend in gross value added (GVA) at basic prices, since it strips away the effects of indirect taxes and subsidies. It is growing more slowly than the headline gross domestic product (GDP), perhaps because of the sharp decline in the subsidy bill combined with strong indirect tax collections.
GVA growth in the fiscal year 2016 is more or less the same as it was in fiscal year 2015. The GVA numbers show a steady economy rather than an accelerating one. So a lot depends on what measure of economic activity is considered—GDP or GVA.
The inflation story that can be gleaned from the new numbers—specifically the trend in the implicit price deflator—is not exactly worrisome, but it does suggest that disinflation is coming to an end. The more recent data on wholesale and consumer prices also supports the view that inflation could have bottomed out. That leaves the Reserve Bank of India will little room for an interest rate cut next week.