The National Accounts Division of the Central Statistics Organisation does not make life easy for you. The 31 May press note is in pdf format, which takes a long time to be copied and transposed on to a spreadsheet. Here is yet another appeal to them to make the next data release, for Q1 of the current year due on 31 August, downloadable in XLS format.
Back to the numbers. For the India growth story, I prefer to look at growth rates of gross value added (GVA) rather than GDP, which adds on indirect taxes (net of subsidies) to GVA. This add-on can be more easily visualized today after the goods and services tax (GST) was introduced, as a value added tax, levied on the (tax-excluded) value of production. GVA growth rates are based on that underlying value. GDP at current prices is perfectly valid as the aggregate of expenditure in the economy inclusive of indirect taxes like GST, to use as the denominator for fiscal or external trade deficit percentages. But for assessing real growth, GDP is a little difficult to comprehend in countries like India, where the pattern of indirect taxes and subsidies varies from year to year.
GVA real growth by contrast is easy to comprehend, and enables a decomposition of overall growth into sectoral components, and an examination of what drives each sector. GDP, on the other hand, is decomposed into expenditure components, of which investment is an important one, but the further breakdown of investment into public and private investment is issued with a considerable time lag. There are measurement problems, leaving a statistical discrepancy to bridge the gap between the whole and the sum of its parts, which can sometimes be as high as 4% of the total.
GVA growth in Q4 of FY18 was 7.6%, close to the GDP growth rate of 7.7%. So, on that basis, can we take the Reserve Bank of India (RBI) projection of 7.4% GDP growth as reasonable, even perhaps a little conservative? We need to look at the components of GVA for that.
I like to construct an aggregate which I call core GVA, after excluding from overall GVA two sectors—agriculture and public administration. Agriculture carries monsoon-driven volatility, and although it certainly has knock-on effects on manufacturing and other sectors as well, GVA, after leaving out agriculture, excludes the primary impact of that exogenous variability. Public administration, likewise, is subject to a periodic ramp-up in real salary scales of civil servants, as happened recently with implementation of the Seventh Pay Commission scales for salaries and pensions. And indeed, Q4 of FY18 was afflicted by one such bump-up in real growth in public administration, which looks as though the sector suddenly generated more value-addition and became more productive, which we know is just a mirage.
Core GVA had already clocked 7.4% in Q3, when total GVA showed a Q3 growth rate of just 6.6%. Total GVA spurted only in Q4. The persistence of elevated core GVA growth over two quarters does yield some ground for growth optimism. However, core GVA growth declined slightly to 7.2% in Q4, so this is something that calls for further inspection of sectoral constituents.
The two sectors which ticked down in Q4 were finance, and a composite sector comprising internal trade, transport and communication. Together, these account for around 40% of total GVA, so the lower growth in Q4 is worrying for both—especially since these growth rates are with respect to Q4 in FY17, which had already ticked down following demonetization. The slowdown in finance is known; the banking sector mess is yet to be resolved. But internal trade and transport? This is normally the most resilient sector of the Indian economy. Of all the constituents of core GVA, it suffered the least after demonetization.
The two core GVA constituents which did grow faster in Q4 were manufacturing and construction. The latter, in particular, has picked up very rapidly over the last year after its descent into negative territory following demonetization. Construction has been driven by generous budgetary provisions at the Centre for affordable housing, highway construction and rural roads. Construction pulls up manufacturing with it through upstream demand for cement and steel. However, some other sectors of manufacturing growth like graphite are benefiting from pollution controls in China. Growth at the cost of pollution, which other countries are sensibly fending off, is not a happy thought.
Will rapid growth in construction and modest growth in manufacturing be enough to carry us into overall growth of 7.4%? We still need some recovery in the other sectors which carry a much larger overall weight for that to happen. Finance will most likely remain subdued, as more and more banks get roped into prompt corrective action, with curbs on new lending. As for internal trade, the e-way bill introduced starting 1 April has been a very good development in terms of curbing fake input tax credits in GST, and has thankfully been well handled by the National Informatics Centre (NIC). Its impact in terms of recorded volumes should hopefully be positive. Construction, fuelled by public expenditure, looks set to remain buoyant because it has the highest employment elasticity, and a government going into a general election wants to generate jobs.
By the same token, however, the portents for fiscal consolidation are not so good. When public expenditure on construction is added on to the promise to agriculturalists of farm-gate prices at 50% above the cost of production (just announced for kharif crops), and when this is further added on to the clamour for cuts in domestic taxes on petroleum products, it will be difficult to rein in the fiscal deficit at 3.3% of GDP. Slippage to 3.5% at the Centre is likely and will probably do damage if resisted. The effort should be to see that the deficit does not rise above that.
Moving to inflation, the prospects of keeping to the monetary policy committee’s projected range of 4.7-4.9 seem rather doubtful. Core consumer price index (CPI) inflation in India, excluding the food and beverages group along with the fuel and light group, has been rising, and reached 6.24% in May. Core inflation usually lies below the headline level, which is pulled up by food inflation, and, before 2014, the price of oil. Now the situation is reversed. Core inflation is above 6% for a headline inflation rate below 5%. A fall in core inflation seems unlikely on account of the many infrastructural infirmities in the system which pose bottlenecks to the movement of goods and people. If fuel inflation rises, which seems likely in the face of unwillingness to cut domestic taxes on fuel, the headline rate looks likely to rise above its May level of 4.9%.
However, there is a contrarian, more optimistic expectation forecast from a new monthly survey started in May 2017 by Abhiman Das, formerly at RBI and now at the Indian Institute of Management in Ahmedabad. This survey shows that in April, expected headline CPI inflation one year ahead, averaging across the more than 2,000 units surveyed, was expected to be at 4.7%. An even lower expectation of 4.2% one year hence was pinned to inflation in the cost of production. So there certainly exists some survey-based support for the optimistic inflation projections of the MPC.
The infrastructure programme of the Central government is exactly what we need in terms of necessary conditions for reducing core inflation in the long run. Housing and transportation are the key elements which ramp up the cost of hiring. But there continue to be infirmities at ground level. There are documented instances reported by Rohini Pande, for instance, of affordable housing provided to slum residents apparently being rejected because the new locality leads to loss of social capital built up in the slum environment.
Lack of connecting transportation has a lot to do with it too. The Delhi Metro, a grand connectivity network, does not displace anywhere nearly as many private vehicles as it could, because the feeder network to Metro hubs is so poor. Although the published timetable for bus routes shows the frequency of service as three per hour on some feeder routes, there is the peculiarly Delhi phenomenon of buses arriving at a stop three in a cluster. The first picks up the waiting passengers, while two others rattle behind the first with no passengers.
These ground level failings are the frictions that keep us at low levels of productivity and high levels of core inflation. They are what make people in the workforce put in as many as up to 12 hours a day for a job with 8 hours of work content. They contribute to the decline in labour force participation of women. The deadweight loss of time in transportation is what makes the effective wage received per hour of time expended much lower than the hourly wage payout by the hiring entity.
For now, it seems possible that growth in the current year could clock in at 7.4%, with headline inflation below the 6% upper bound of the inflation target but most likely not below 5%, and a fiscal deficit at the Centre possibly reined in at 3.5%.
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