GDP growth rate - Good days ahead?

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Introduction

Just on the eve of Holi, Central Statistics Office (CSO) gave a sweet gift of latest economic data which reveals growth at 7.2% for the 3rd quarter ending in December 2017. As per the data, this is the highest quarterly growth rate since Q2 of 16-17. We also accelerated ahead of China in terms of growth rate for 3rd quarter, as China recorded a growth rate of 6.8%.

This is a silver lining on the dark clouds of lingering demonetization, GST implementation, job woes etc. as we registered 5.7% growth in Q1 and 6.5% growth in Q2 of 17-18. For FY 17-18, the estimated growth rate now stands at 6.6%. Yes, this is lower than the growth rate of 7.5% for 16-17, as FY 17-18, went into reforms and corrections. But this is in line with the Economic Survey as it suggests these reforms and corrections will help us grow above 7% in FY 18-19.

What are the reasons of this growth?

This is necessary to understand because we have been facing inorganic growth. Also, the Economic Survey had concerns over macro-economic variables like fiscal deficit and inflation. So, if we are beating all the odds here and growing, where is this growth coming from?

As per the data released by CSO, growth rates in various sectors are as follows: Agriculture, forestry and fishing (4.1 percent), Mining and Quarrying (-0.1 percent), Manufacturing (8.1 percent), Electricity, gas, water supply and other utility services (6.1 percent) Construction (6.8 percent), Trade, hotels, transport, communication and services related to broadcasting (9.0 percent), Financial, real estate and professional services (6.7 percent), and Public administration, defense and Other Services (7.2 percent).

The growth rate achieved is on the back of buoyant growth in trade, manufacturing and construction sectors.

What does this mean?

These growth rates and statistics show that economy has bottomed out of the slump it was in due to demonetization and GST. 8 percent growth rate in manufacturing sector means that it has recovered from GST blip and implementation issues.

Meanwhile almost 7 percent growth rate in construction is positive news as it employs and generates jobs in mass. Where the government is already struggling to provide for jobs, this might just be the much-needed breather it needed. Growth in agriculture sector is also in the same line as the sector is still the primary job provider for most of the labour workforce of our country. As per some of my estimates, the agriculture sector contributes to around 14% of total GDP, but still is the domain of employment of more than 50 percent of the workforce available in the country.

The growth in utility and other services is buoyed by aim of the central government to provide electricity to all by 2022, and other welfare schemes such as Ujjawala Yojna etc. Also, there has been higher spending by the government as it has already exceeded its fiscal deficit target.

In the list of good news is growth in various components of expenditure on gross domestic product, namely, consumption expenditure and capital formation. As per the data released, Gross Fixed Capital Formation (GFCF) at constant (2011-12) prices in Q3 of 2017-18 is estimated at 10.52 lakh crore. The rate of GFCF as percentage of GDP in Q3 of 2017-18 is 32.4 percent, as against the corresponding rate of 31.0 percent, respectively in Q3 of 2016-17. This shows that economy is on track as fixed capital investment means more sustainable growth.

In case of Private Final Consumption Expenditure (PFCE) and Government Final Consumption Expenditure (GFCE), at constant (2011-12) prices in Q3 of 2017-18 are estimated at 19.19 lakh crore and 3.23 lakh crore respectively. The rate of PFCE and GFCE as percentage of GDP in Q3 of 2017-18 is 59.1 percent and 9.9 percent, as against the corresponding rates of 59.9 percent and 10 percent respectively in Q3 of 2016-17.

Concerns…

The sector for concern is mining and quarrying which has been a drag on overall growth and also has registered a negative growth of -0.1 percent whereas in Q2 the sector grew by 7.1 percent.

Also, trade deficit widened in Q3 2017. Export growth was 2.5%, while imports were up 8.7%. This suggests that domestic consumption has increased. But, the point of concern here is, while the global economy has grown by almost 4 percent, we were not able to carve out a share for ourselves. The mere growth in exports is a glaring fact to it.

But, the biggest constraint the government needs to bottom out is, bad loans in the books of banks, especially public sector banks. The rise of NPA’s and fraud stricken PSBs are reeling under tremendous pressure and also undermine the recapitalization activity augmented by the government. This sends a negative message throughout the country as government is unable to put a plug to these incidents.

What ahead?

To look forward is how the government takes up initiatives in the sectors where growth has been a concern. Secondly, what steps will the government take to plug the fraud incidences at banks, where the rich of the country are treating them as piggy banks which they can empty at their will? Third, the rising fiscal deficit. The government has already exceeded the fiscal deficit target, which might go against the rating agencies’ policies and also it might put a brake on government expenditure which holds the key to ending rural distress and revive the agrarian economy, which still is the backbone of the economy.