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01 Dec 2017 12:48 PM, Insights Mahesh Vyas

Growth pick-up encouraging but not a trend reversal yet

Real Gross Value Added growth accelerated to 6.1 per cent in the quarter ended September 2017 from the 5.6 per cent registered in the preceding quarter. Similarly, the Gross Domestic Product growth accelerated to 6.3 per cent from 5.7 per cent.

Chief Statistician of India TCA Anant described this as encouraging and a reversal in the declining trend seen in the preceding five quarters.

Growth picked up smartly in three major components of the industrial sector, i.e. in manufacturing, mining and utilities. The manufacturing sector grew by 7 per cent compared to a particularly anemic 1.2 per cent in the preceding quarter; the mining sector’s growth is usually volatile and this quarter it grew by 5.5 per cent compared to a fall of 0.7 per cent in the previous quarter and, utilities (electricity, gas, etc) grew by 7.6 per cent compared to 7 per cent.

The construction sector saw an improvement in growth - from 2 per cent to 2.6 per cent. But, the growth is still poor.

None of these individual growth rates imply any reversal of trend. But, collectively they do show a stoppage of a declining growth trend in industrial growth. Industrial growth has been declining almost steadily since March 2016 when it clocked a 10.3 per cent increase. During the previous quarter ended June 2017, industrial growth fell to its lowest level in five years. Now, with a 5.8 per cent growth during July-September 2017, this declining trend has stopped.

But, a mere stoppage of the declining trend does not imply a reversal. Such a promise could be claimed by the December 2016 industrial growth as well. We know by now that such a promise would have been misplaced. So, we need to wait for a few more quarters before we see a trend reversal. Perhaps, a better way to look for a trend is to see the factors determining industrial growth.

One claim is that the pain of demonetisation and GST is now behind us and therefore we can get back to normal growth. But, GST itself seems to have caused no problem because the manufacturing sector has done well in the very first quarter of its launch. It was perhaps, the uncertainty of GST that caused a fall in the growth in manufacturing during the April-June quarter.

Moving ahead, the uncertainties can be expected to decline further, teething problems to be resolved and a new system will get established reasonably soon. This should see a corresponding improvement in the quarterly estimates of GVA. But, that may not reflect the status of the economy as a whole.

Quarterly estimates do not take into account sufficiently, the performance of the medium and small enterprises which were the ones affected severely by demonetisation and GST. Further, both demonetisation and GST effectively favoured larger enterprises because they are better equipped to handle these shocks. The performances of these larger companies is a part of the quarterly GVA computations. Thus, the upside effects of demonetisation and GST is built in into the official statistical machinery and is probably already reflected in the improvement in growth in the July-September 2017 estimates.

Demonetisation and GST are not the only woes of the overall industrial sector. These are recent problems. The declining trend predates these shocks. Nothing has changed to imply a reversal of this trend. Investments continue to remain very low even according to the July-September 2017 GDP estimates. Since capacity utilisation is still very low investments are unlikely to pick up in a hurry.

The government’s commitment to a conservative fiscal policy implies that demand will continue to remain low and there will be no respite from the vicious cycle of low capacity utilisation and low investments ratio in the near term. On the contrary, given the high fiscal deficit of 96 per cent of the annual target till October 2017, the government may in fact curtail expenses and in the process hurt aggregate demand.

A curtailment of government expenses in the second half of the year could also directly impact the growth of GVA through a slowing down of the growth in the community, social and personal services sub-segment.

Expectations that monetary policy could spur growth overestimates the power of such policy.