Behind GDP data, some signs of concern
The recent release of second-quarter (Q2) gross domestic product (GDP) data for 2017-18 is encouraging at first glance as both the supply side (gross value added, or GVA, at basic price went up from 5.6% to 6.1%) and demand side (expenditure method data rose from 5.7% to 6.3%) have notched up higher growth over the previous quarter. A comparison of the relevant quarters (Q2 2016-17 with Q2 2017-18) shows a slowdown, with GVA down from 6.8% to 6.1% and GDP growth down from 7.5% to 6.3%.
A critical look at the data shows that on the supply side, growth is supported by mining, which recorded a 5.5% growth as compared with 1.3% in Q2 of 2016-17. Similarly, trade, hotel transport and communications have recorded improvements, along with public administration and defence.
However, there should be concern that agriculture has shown a significant slowdown at 1.7%, against 4.1% in Q2 of 2016-17. Manufacturing has recorded some deceleration along with construction, where growth has been at 2.6%, down from the 4.3% witnessed in Q2 of 2016-17.
What emerges is an economy marked by a slowdown in agriculture, deceleration in manufacturing and construction, and, more importantly, deceleration in investment coupled with the predominance of consumption-led growth. These developments raise some questions on the soundness and sustainability of the growth trajectory.
On the demand side, growth rates of government final consumption expenditure (GFCE) at constant prices recorded an estimated increase of 4.1%, against 16.5% during Q2 of 2016-17. While the growth of private final consumption expenditure (PFCE) moderated at 6.5%, compared with an increase of 7.9% in Q2 of 2016-17, the share of the PFCE in the total GDP continues to be at around 54%. Similarly, the share of the GFCE is steady at around 13%.
Higher car sales and enhanced international passenger traffic indicate the swelling of urban consumption expenditure. In the near term, the urban and government consumption expenditure will go up due to the impact of the Seventh Pay Commission award. Besides, higher sales of two-wheelers and tractors point to some upward movement in rural demand.
The Reserve Bank of India (RBI) monetary policy report of October 2017 has noted that “retail consumption activity, reflected in withdrawals of personal loans from scheduled commercial banks (SCBs), suggests that underlying conditions are supportive of consumption demand, going forward.”
The stressed balance sheets of banks and corporations have continued to act as a drag on investment activity. Households’ investment in dwellings, other buildings and structures have remained subdued as inventories rise on the hope of steep price corrections.
In the Mumbai Metropolitan Region alone, an estimated 350,000 houses (52% of inventory) under construction are unsold, according to Cushman & Wakefield and realty data analytics firm Propstack.
The RBI has also cited a report by Centre for Monitoring Indian Economy to say that new investment proposals declined significantly in Q2 of 2017-18 in terms of both numbers and value. Only 403 new projects were announced, the lowest since Q1 of 2004-05. Plant load factors in thermal power plants underwent a sustained decline, largely reflecting weakness in demand from financially stressed distribution companies.
Weak investment demand, as discussed above, would impede a higher growth trajectory. To top it, the predominance of consumption-led growth is a matter of serious concern in terms of sustainability. Consumption-led growth can arguably lead to a slackening of future growth if it entails growing imbalances due to limits to capacity creation and rising debt burdens, particularly for households. In this context, it is important to note that the RBI study has indicated that consumption-led growth was found to have a negative impact on GVA growth one-year ahead by 1.39 percentage points at 5% statistical significance level.
Economic growth is a function of investment limited by savings. Household financial savings—the most important source for investment in the economy—picked up to 7.8% of gross national disposable income (GNDI) in 2015-16.
Savings of private non-financial corporations increased to 10.8% of GNDI in 2015-16.
At the same time, general government’s dissaving (which is closely related to revenue deficit) declined to 1% in 2015-16. Preliminary estimates show the household financial savings rate increased further to 8.1% of GNDI in 2016-17 owing to an increase in households’ assets in bank deposits, life insurance and mutual funds. The dissaving by the Central government in terms of persistence of revenue deficit at a higher level makes economic growth unsustainable. It is also disruptive because of crowding out of private investment by increased government consumption and higher borrowings.
In sum, the picture that emerges is of a drive that is on the road to growth but with quite a few critical signs that indicate all may not be as well as it might seem. The Billion Press
R.K. Pattnaik and Jagdish Rattanani are faculty members at the S P Jain Institute of Management and Research.
Comments are welcome at firstname.lastname@example.org