Down and out

The Central Statistics Office of the Union Ministry of Statistics and Programme Implementation released on Thursday its estimates of the gross domestic product (GDP) for the first quarter – that is, April to June – of the current financial year. They surprised on the downside; GDP growth during the quarter was 5.7 per cent, when many estimates had expected it to come in at between 6.5 per cent and 7 per cent, year on year. There have been several successive quarters of slowing growth now, and the government must examine carefully what it is doing wrong. It is worth noting that year-on-year GDP growth has slowed as compared to the fourth quarter of 2016-17. Perhaps some of this is due to anticipation by companies of the effects of the goods and services tax (GST), through de-stocking and so on. That said, some factors should have pushed it higher. For one, the remonetisation process has been completed, allowing for pent-up consumer demand to be expressed. The government has also spent freely. Taken together, this indicates that the economic situation is even worse than previously assumed.

Examining the data more closely is not reassuring. Naturally, there might be something of a rebound going ahead, as Chief Statistician T C A Anant has pointed out, because the inventory build-up prior to the festive season will be “compressed” this year. But other aspects suggest any future rebound will not be emphatic or sustainable. For one, gross fixed capital formation remains anaemic. No investment revival is discernible in the data. In addition, the government has already spent heavily, running through a reasonable proportion of its fiscal space. Government final consumption expenditure went up by 12.6 per cent, year on year, when measured in constant prices, as compared to 11.3 per cent last year. Growth in government spending cannot constantly outpace general economic growth without severely retarding India’s fiscal consolidation efforts.

Another concern is the manufacturing sector. Gross value-added (GVA) at basic prices for the first quarter of 2017-18 for this sector grew by 1.2 per cent; year-on-year growth in the corresponding quarter last year was 10.7 per cent. This reflects the differing figures given for growth in the component of the index of industrial production (IIP) that measures manufacturing output for the two quarters. IIP manufacturing grew by 1.8 per cent in the first quarter of 2017-18, while it grew by 6.7 per cent in the first quarter of 2016-17.

It is clear that the government must now deal with this slowdown on a war footing. Investment, manufacturing, and small and medium enterprises (SMEs) need close attention. The GST may hurt some SMEs going forward, and its deleterious effects on this sector must be isolated and corrected. Meanwhile, clearing the investment pipeline needs to be focused on in a laser-like manner. Until a better investment climate is created and the slow growth of bank credit and the debt overhang problem is addressed, reviving overall growth will be impossible. The government needs to improve its economic management, and fast.