Home/ Opinion / GDP numbers continue to confound

The estimates of gross domestic product (GDP) for the third quarter of 2015-16 and forecast for the financial year were released on 8 February. These show that all is well with the economy. Gross value added at basic prices is expected to increase 7.3% in real terms this year; a small uplift from last year’s 7.1%, but a lift nonetheless. GDP at market prices (adding taxes, subtracting subsidies) shows a higher rebound of 7.6% from 7.2% in the previous year, as taxes grew smartly and subsidies contracted sharply (by 1.3%).

Where did this growth come from? Considering the concern over weakening economic activity in multiple quarters of late, including in the government’s mid-year economic review, the sources of this improvement merit a look. According to the supply-side breakup, only one sector really improved its performance vis-à-vis last year. That is manufacturing, which grew at a brisk 9.5%, a huge step-up from a 5.5% growth rate in 2014-15. While all others segments reflect a deceleration, services categories like trade, hotels, communications and financial services, real estate and professional services are not doing too badly—these are expected to grow 9.5% and 10.3% respectively against 9.8% and 10.6% last year—just a tad slower.

On the demand side, private consumer spending strengthened to 7.6% over last year’s 6.2%, no doubt spurred by lower fuel and other prices despite a rural component struggling from two adverse monsoons in a row. This apart, both government spending and aggregate private investment (the sum of gross fixed capital formation, inventories and valuables) slowed. The former quite sharply, but not surprising as low oil prices facilitated enormous subsidy expenditure reductions.

The decline in investment growth to 5.6% in real terms from 6% in 2014-15 is puzzling against the robust jump in manufacturing, where much of the investment typically takes place. Gross fixed capital formation rate, which informs us about fresh capital assets created in the economy thereby adding to its productive capacity, actually fell to 31.6% in real terms from last year’s 32.3%. The manufacturing performance has been explained by the chief statistician, T.C.A. Anant, as efficiency gains from lower input prices (gross value added)—the corporate sector’s advance filings showed negative sales growth but positive net profits before tax.

So is it the case that private businesses are profitable but consistently slowing investment nonetheless? If so, then they must expect future sales and profits, which along with the cost of capital determine current period investment, to decline. And if that indeed is the case, should we expect a recovery to continue, consolidate ahead? Right now, the economy is coasting along on good luck (amazingly low oil-commodity prices) and private consumption demand, both of which are eventually unsustainable. Of course, a good monsoon this year could be another stroke of good luck and private businesses may after all decide to respond with a lag. It is noteworthy though that the new GDP data by now invokes near-unanimous disbelief from trackers and analysts, who have roundly noted its variance with indications of falling production, spare capacity in factories, and so on.

Renu Kohli is a New Delhi based economist.

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Updated: 09 Feb 2016, 09:39 PM IST
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