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Focus on Investment

India’s GDP growth rate is slow and investment remains low and falling.

The First Advance Estimates of National Income, 2017–18 released on 5 January by the Central Statistics Office (CSO) estimates that the economy is growing the slowest it has in the last four years. These estimates, using six to eight months of data on the Indian economy, are used for the formulation of the Union Budget to be presented on 1 February. Notwithstanding the government’s optimism about year-on-year investment growth, gross fixed capital formation (GFCF) as a proportion of gross domestic product (GDP), a key indicator of an economy’s ability to grow, is the lowest since the new National Accounts Statistics (NAS) series began in 2011. Further, there are uncertainties in these estimates because of demonetisation in 2016–17 and the disruptive introduction of the goods and services tax (GST) in 2017–18.

In order to understand what to expect from the data at hand, a quick summary of what it says is in order. The data estimates that real GDP will grow at 6.5% during 2017–18, year-on-year, lower than the 7.1% estimated for the previous financial year. Gross value added (GVA) at constant prices is expected to grow at 6.1% compared to the previous year’s provisional estimates that record growth of 6.6%. The other component of GDP, net taxes on products, is expected to grow slower than last year at 10.9% as the indirect tax revenue collections are slower on account of GST.

The agricultural sector, which employs the most people, will do worse this year than it did in the previous year, according to the GVA data. The longer trend is of an unremarkable recovery of growth rates of the agricultural sector over the last few years. This inadequate recovery partly explains the continuing trend of the falling share of the agricultural sector in overall GVA, which is now estimated to be 14.6% this year. The services sector accounts for over 40% of the share of GVA and is expected to grow marginally better than it did in the previous year. The manufacturing sector is expected to grow at a rate lower this year than it did in the previous year. The Purchasing Managers’ Index, however, is more optimistic and sees positive signs of growth in the second half of the year. On the exports front too, India’s performance has been quite modest, while global trade has picked up over the last half-year.

In general, the CSO computes growth of current estimates over revised estimates of earlier data. This tends to give the ­initial full-year estimates of growth rates of GVA an upward bias. Subsequent revisions tend to be downwards; at least that has been the trend so far. The government, however, seems to expect that the growth rates will be revised upwards. It believes that the second half of 2017–18 will be better than the first. The behaviour of NAS data so far would not support such a possibility, nor would other ­indicators of economic activity.

However, some analysts argue that if there is an upward revision of subsequent estimates for the current year, it will be a statistically generated boost to growth rates. This argument is based on the expectation that the First Revised Estimates, due to be released at the end of January 2018, will revise the growth rates for 2016–17, the year of demonetisation, downwards. This will create a “low base” effect and make the year-on-year growth rate for the current year look better than it is when the second advanced estimates come in by the end of February. This is intuitively possible, given that better quality data should tell us more about demonetisation’s negative macroeconomic effects. However, it would not be surprising if we see a situation where the estimates for 2016–17 and 2017–18 are both revised downwards.

Leaving aside the statistical aspects of measuring growth, the most important indicator of the health of the economy—investment—as measured by GFCF has been in decline. Private and public final consumption expenditure growth, the two other important indicators, are expected to fall year-on-year in 2017–18. The GFCF as a proportion of GDP has undeniably declined to 29%, down from 34.3% in 2011. Investment has not been growing at the rate required to return to the trend rate of growth witnessed from 2004–05 to 2011–12. After three years of experimenting with ways to encourage investment, alongside self-imposed unreasonable fiscal constraints on the Union Budget, the Narendra Modi government has a choice. It can ignore ratings agencies and ­instead spend more and in ways that can create employment, ­secure livelihoods, and ­increase purchasing power in the economy.

What must it focus on? The government needs to avoid big-bang political moves. Demonetisation and the hurried implementation of GST were not good for the economy. The focus must be on investing in measured policies that address issues of rural infrastructure, public investment in agriculture, rural non-farm employment, and in particular, employment generation in manufacturing, and public services like health and education. All these would be key to raising incomes that would then create the necessary demand in the economy to boost investment.

Updated On : 13th Jan, 2018


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