The economic growth data for the first quarter (Q1) of the 2018-19 fiscal year was released last week and it served a positive surprise. While it was largely expected that it would be on the higher side due to a base effect, growth in gross domestic product (GDP) eventually clocked in at 8.2 per cent, which counts as a significant number especially when it is considered that growth in gross value added (GVA) at basic prices was also at 8 per cent. Some of the additional impetus to growth came from agriculture. This, however, should not be seen as a sign that rural distress is over, since it was mainly due to a sharp increase in the output of livestock, dairy, forestry and fishing. The farm sector will continue to need attention, including through increasing the efficiency and breadth of the procurement system.
The other big component of growth is in manufacturing, which grew by 13.5 per cent according to the figures — in the first quarter of last financial year, it had shrunk by over a percentage point. The latest figure, while high, should be viewed with a certain caution because it does not fit in easily with other indicators, including the Index of Industrial Production (IIP). What is, however, important to note is that some sectors negatively affected by demonetisation and the goods and services tax (GST) shocks have thoroughly recovered — real estate being one among them. Most importantly, there appears to be solid growth in gross fixed capital formation (GFCF), which grew at 10 per cent in Q1 2018-19, albeit off the low base of 0.8 per cent growth in the equivalent quarter of the previous year. This has led to, unexpectedly, GFCF becoming a larger proportion of output — 28.8 per cent as distinct from 28.7 per cent. However, it is too early to say if this is a sustained reversal of the ongoing investment crunch. Private consumption picked up in the first quarter, implying a recovery in consumer demand, which drives the economy.
In general, while the good news in growth must come as a significant boost to the government, it is too early to wonder if the full-year growth expectation of 7.5 per cent should be revised. Future quarters will not have the benefit of a significant base effect, as was the case with this quarter. There are also significant macroeconomic drags. Oil prices have an uncertain forward trajectory and the rupee depreciation might lead to inflationary pressures as well. The government will also face a difficult choice thanks to the tight fiscal arithmetic. The revenue deficit has already barrelled through the full-year estimate. The government will have to decide between populist spending in the lead-up to the election and maintaining fiscal discipline. Of particular concern would be to figure out a way to keep capital spending at the level that has propped up sectors such as construction and therefore overall growth. It would be unwise to compromise on fiscal discipline at a time when it is clear that the macroeconomic situation could surprise on the downside. In addition, if growth in capital formation is to be sustained, the government will have to keep its borrowing carefully constrained, and allow the private sector the space to revive.