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ANALYSIS

Green shoots

by Mahesh Vyas

The government released provisional estimates of growth in 2017-18 along with estimates of growth during the last quarter of the same year.

Growth slowed for a second consecutive year in 2017-18. GDP growth was 6.7 per cent compared to 7.1 per cent in 2016-17 and 8.2 per cent in 2015-16. GVA growth slowed to 6.5 per cent compared to 7.1 per cent and 8.2 per cent in the preceding two years.

Quarterly estimates seem to indicate that the economy is turning around. The Y-o-y growth rates improved during each of the four quarters of 2017-18. The growth rate rose from 5.6 per cent in the first quarter to 6.3 per cent in the second, 7 per cent in the third and then 7.7 per cent in the fourth. Similar improvement is seen in the GVA growth rates as well.

While the sequential series of growth rates suggest a turnaround, the underlying factors that could cause a revival are still not robust enough to suggest an early acceleration of the growth rates to a higher level. There are some green shoots and it is imperative that these shape well to ensure a higher growth trajectory in the future.

Acceleration seen in the four quarters comes largely from a pick-up in investments. Y-o-y growth in gross fixed capital formation increased from 1 per cent to 6 per cent, then 9 per cent and 14 per cent. As a result, the investment ratio in nominal terms has risen steadily to reach 29.1 per cent. This is the highest investment ratio in 7 quarters.

Y-o-y growth in gross fixed assets reflects a rapid recovery from the steady and sharp fall seen since the recent peak seen in June 2016. But, it is imperative that this recovery is strengthened further.

Annual data on investment ratio shows that the investment ratio has been stable at 28.5 per cent over the past three years. So, the steady acceleration we see in investments during the four quarters of 2017-18 boils down to a stabilisation of the investment ratio which hitherto was falling steadily. The investment ratio was 34.3 per 2011-12. By 2015-16 this had fallen to 28.5 per cent and this is where it has stabilised.

This stabilisation in the investment ratio needs to rebound to higher levels to ensure that growth ensues in the following quarters. Signs that it may scale higher currently outweigh signs that show a challenge.

New orders have shown signs of improvement. The value of new orders spiked in March 2018. More importantly, there is a palpable increase in the number of listed companies reporting new orders for machinery and construction during the second half of 2017-18. The order-book-to-sales ratio shot up in the quarter ended March 2018 to 3.5x. It never crossed 3x in the past ten years.

Listed companies reported an acceleration in growth in net fixed assets to 12.1 per cent as of March 2018. This is the highest Y-o-y growth in the past four years.

Capital goods production index has been accelerating. It registered a Y-o-y growth of 9 per cent in the quarter ended March 2018. But, it also recorded a decline of 1.8 per cent in March 2018.

While the growth in order books, asset formation in companies and the acceleration in capital goods production is promising, the sustenance of this growth faces a challenge in the rate at which consumption grows. RBI’s OBICUS shows a small improvement in capacity utilisation in the quarter ended December 2017 to 74 per cent from 71 per cent in the preceding quarters. But, this is too small to make a material difference.

Government data show that real private final consumption expenditure growth was lower in 2017-18 than it was in 2016-17 and unlike the growth in GFCF it was not accelerating during the quarters but was in fact, somewhat decelerating. PFCE growth declined from 6.9 per cent in the first quarter to 6.8 per cent in the second and then to 5.9 per cent in the third. It picked up though in the fourth quarter to 6.7 per cent.

Low and stable inflation should help steadily accelerate consumption growth. Increased government spending, which is also evident in the quarterly GVA estimates is also expected to help maintain some buoyancy in private consumption expenditure.

Domestic demand, both, consumption and investment demand, is important because exports are a drag. Exports growth in GDP has been consistently significantly lower than the overall growth in real GDP since 2014-15. In 2017-18, exports grew by 5.6 per cent while GDP grew by 6.7 per cent. In the quarter ended March 2018, while the real GDP growth accelerated to 7.7 per cent, exports growth slipped to 3.6 per cent. GST woes and bank lending restrictions could continue to bedevil exports in the quarters ahead.

India has rarely accelerated growth significantly without a substantial support from exports. The low prospects of exports growth is therefore a dampener. It is also important that private final consumption expenditure does ramp up to support the green shoots seen in investments.

We expect growth to accelerate moderately in 2018-19. Our expectations hitherto were of a growth rate below 7 per cent. But, recent data indicate that growth in the 2018-19 could be 7 per cent or possibly even a shade higher.