Govt spending buoys growth2 min read . Updated: 10 Feb 2009, 10:04 AM IST
Govt spending buoys growth
Govt spending buoys growth
What will be the main contributors to this growth? A big boost is expected from government expenditure, which increased by 8.1% in the first half and is estimated to increase by a massive 23.7% in the second half.
Private consumption, as measured by PFCE (private final consumption expenditure), is expected to grow by 7% in the second half, slightly higher compared with the 6.5% in the first half. And gross fixed capital formation is estimated to show a steep decline in growth, from 11.4% in the first half to 6.5% in the second—that’s clear from the decisions of companies to shelve their expansion plans.
Also See Govt Expenditure Spurts In Second Half (Graphic)
Surprisingly, export growth, which was 16% in the first half, is estimated to rise to 24.9% in the second half. Similarly, the growth rate of imports, too, is expected to go up from 23% in the first half to 32% in the second.
That seems strange, given the slowdown in demand on the one hand and the slump in exports in recent months on the other.
In short, CSO’s optimism is based on higher government spending, a small rise in private consumption growth and higher exports. Of these factors, the rose-tinted view about exports does not seem to be grounded in reality.
Classifying GDP (gross domestic product) by economic activity, the sectors that show higher output growth in the second half are “community, social and personal services", “mining and quarrying" and “electricity, gas and water supply".
“Community, social and personal expenditure", which grew by 8% in the first half, is expected to grow by 10.5% in the second half, again the result of higher government spending. The services sector is expected to hold up well, as can be seen from the chart.
In contrast, manufacturing is expected to do much worse, with growth decelerating from 5.3% in the first half to 3.1% in the second. The biggest slowdown, however, is in the construction sector. While construction grew by 10.5% in the first half, growth is estimated to slow to a tepid 2.8% in the second half. That fits in well with anecdotal evidence.
In short, the better-than- expected GDP estimates are based on the effect of higher government spending and due to the fact that growth in the services sector has remained strong.
At the same time, too much is expected from export growth. Perhaps the best way to look at the 7.1% growth number is to take it as an upper limit, with actual growth likely to come in lower.
The key fact remains, as ABN Amro senior economist Gaurav Kapur points out, that a strong government push is imperative to prop up GDP growth and will be needed in FY10 as well.
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Graphics by Ahmed Raza Khan / Mint