The Reserve Bank of India’s (RBI’s) annual report has this to say on the sources of growth in the Indian economy this year: “While a durable pick-up in investment activity remains elusive, consumption will continue to provide the main support to aggregate demand and may receive a boost from the revival of rural demand in response to the above-normal and spatially well-distributed south-west monsoon as well as from the seventh pay commission’s award.” In other words, the central bank is betting on Indians loosening their purse strings both in urban and rural India as government employees are flush with wage hikes and a normal monsoon results in a bountiful farm output. RBI believes this boost to consumption will lead to gross value added (GVA) growth of 7.6% for 2016-17, up from 7.2% last fiscal year.
RBI’s assumptions seem realistic. Its own survey of professional forecasters earlier this month showed that agriculture will grow at 3.2% during the current year, higher than the previous year’s growth rate and a contraction in FY15. As of 18 August, cumulative rainfall was at its long period average with adequate spatial distribution and kharif sowing had risen 6.5%, the RBI report noted.
A fillip to agricultural growth will undoubtedly increase the consumption power of rural residents. Another consumption wave will be from the wage hikes. The government has already announced that it will implement the pay commission-recommended wage hikes in the August salary along with all the arrears. The possibility of the allowances part being paid in the fourth quarter of FY17 will give more firepower to government servants to spend. All in all, the hikes being timed close to the festive season give enough motivation to spend.
Amid this optimism, the missing drivers of growth, investment and exports, will remain so even this year. The annual report stated that a durable pickup in investment activity remains elusive and industrial activity has been in contraction mode in the early months of 2016-17. “Looking ahead, no strong drivers are discernible at this juncture that could engineer a turnaround,” the report said. Indeed, the increase in the contribution of private consumption expenditure to GVA growth over the last four years shows that the economic recovery has been powered by consumption. Gross fixed capital formation has remained subdued and exports continue to contract. Exports contracted 6.84% in July this year.
Says the annual report: “Successive downgrades of global growth projections by multilateral agencies and the continuing sluggishness in world trade point to further slackening of external demand going forward.” The services sector, buoyed by the government pay hikes, will once again see good growth.
The fact remains, though, that with no pickup in investment and in exports, the economy will continue to fly on only one engine—consumption.
