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ANALYSIS

Kinks in the growth story of 2017-18

by Mahesh Vyas

Real gross value added grew 6.5 per cent in 2017-18. This is slightly better than expectations of professional forecasters who, according to RBI’s survey of early April 2018, had expected a median growth of 6.4 per cent.

But, professional forecasters have been moderating their views for the year consistently albeit somewhat hesitatingly. Expectations fell from 7.9 per cent in June 2016 (pre-demonetisation) to 7.3 per cent in April 2017. It was hoped for quite some time that demonetisation would not hit the economy too badly. This view was corrected in October 2017 when the forecast for the year dropped to 6.6 per cent.

2017-18 has turned out to be the worst in the past four years.

Agriculture grew by 3.4 per cent and, industry by 5.5 per cent in 2017-18. Both these sectors recorded growth rates that were lower than in the previous year. The services sector accelerated a bit - from 7.5 per cent to 7.9 per cent.

Public administration contributed substantially to the overall growth during 2017-18. It expanded by 10 per cent. This is the second consecutive year when public administration has helped shore up the growth of the Indian economy. In 2016-17, it grew by 10.7 per cent. This is exceptional. At least in the past 27 years (since 1990-91), public administration grew in double-digits only following a crisis - in 1999-00 following India’s balance of payment crisis and following the global financial crisis in 2008-09 and 2009-10.

It appears from the above that the government has been pump-priming the economy in the past two years to offset the ill-effects of demonetisation and the fallout of GST implementation issues.

Quarterly estimates of GVA also show the importance of public administration in growth in recent years. Public administration grew 13.3 per cent in real terms, y-o-y in the quarter ended March 2018. This was on top of a 16.4 per cent increase recorded in March 2017. Both these growth rates are significantly higher than the average 6-7 per cent y-o-y growth seen in public administration in the quarterly series. The March 2018 quarter wouldn’t look as impressive without the extraordinary contribution of public administration.

High growth rates in public administration, such as those seen in the past two years are not sustainable. It is important that other sectors fill the vacuum created by this, reverting back to their mean growth rates.

The second big contributor to GVA growth is “trade, hotel, transport and communication”. This sector grew by 8 per cent in 2017-18. This, perhaps, is the most convincingly robustly growing sector of the Indian economy. Its growth also appears to be sustainable.

Better tax compliance under GST could have contributed to the growth in trade GVA. Nevertheless, micro data do support the robust growth seen in the trade, hotel, transport and communication sector. For example, sale of commercial vehicles and traffic over sea ports, air-routes and railways have been quite robust.

Manufacturing grew by 5.7 per cent in 2017-18. This is its lowest growth rate in five years. But, the sector has been clocking a much better growth rate of 7-9 per cent in the last three quarters of 2017-18. 70 per cent of this growth is derived from the performance of private sector manufacturing companies. Our estimates show that the growth in gross value added from these companies during the four quarters of 2017-18 was - -8.7 per cent, 0.6 per cent, 1.7 per cent and 4.8 per cent. These are much lower than the manufacturing sector’s growth reported by CSO, which are - -1.8 per cent, 7.1 per cent, 8.5 per cent and 9.1 per cent.

It is a bit difficult to envisage the remaining 30 per cent of the growth in manufacturing to be covered by the IIP as explained by the CSO in its Press Note or, by imputations it could be making such as for rent.

It is similarly difficult to relate to the robust 6.7 per cent growth in the financial services, real estate and professional services sector reported in the official statistics given the stress in the banking sector and also the real estate sector. Reliance on corporate sector results for the real estate and professional sector that account for 72 per cent of this sector and for bank deposits and credit to measure growth in banking services may be inadequately capturing the stress in these sectors.

The agricultural sector grew by 3.4 per cent in real terms in 2017-18. This is just a tad below its recent average of 3.5 per cent real growth per annum. The problem is that even with this average growth in agriculture, farm produce prices have been very low. As a result, agricultural incomes grew only 4.5 per cent in 2017-18 in nominal terms. This implies that in real terms (after adjusting for the 3.6 per cent increase in rural consumer price index) farm incomes (purchasing power of their income) barely grew in 2017-18.

For the relatively organised farmers, add to this the fact that rural wages grew by about 5 per cent during the year (average for men and women till January 2018). It is possible then that farmers could have not seen any real growth in incomes.

2017-18 recorded the lowest nominal growth in farm incomes at least since 2005-06.