Are the recent GDP numbers really as bad as they are being made out to be?

The quarterly GDP growth has come down to a 3 year low of 5.7% in Q1 2017-18, this as a result has resulted in various individuals fearing for the Indian Economy. But minus the noise and doomsday forecasts, let’s look at the underlying data to understand the economy better and see if the GDP numbers are really as bad as they are being made out to be.

First let us also understand that some of the government measures were ‘’meant’’ to be disruptions in the short run with a view to streamline the economy in the medium to long term.

The GVA (Gross Value Added)[PDF] which essentially is GDP without the Net Indirect Taxes (NIT=Taxes on products – Subsidies) has grown at roughly the same pace as last quarter at 5.6%. This quarter, the difference between GDP and GVA growth has narrowed down to just +0.1% from 0.5% in the last quarter. This then implies that government’s Net Indirect Taxes were very low.

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A significant part of this low NIT has to do with early presentation of the budget, which meant government expenditure like subsidies were much higher than same quarter previous year while the revenue stream continues throughout the year. To be precise, revenue expenditure net of interest payments increased by roughly 27% y-o-y in Q1 compared to same quarter last year.

The second important insight from the data was the growth in Core GVA (GVA excluding agriculture and public administration). During my interactions, many experts had argued that overall numbers are not reflecting the true picture as agriculture growth was mainly due to favourable monsoon and had very little to do with real changes on the ground.

Also, growth in public administration was cited as a conscious government action to propel growth and stymie the ill effects of demonetisation. A move which was not sustainable without growth in other sectors. Indeed, they seemed right in their assessment as Core GVA growth was just 3.8% y-o-y in Q4 FY17. The Core GVA growth at 5.5% y-o-y in Q1 FY18 is one of the biggest positives from the latest GDP numbers. This reflects that other sectors have started picking up.

The Demonetisation impact was expected to be more pronounced in Q4 FY17 with its impact waning in subsequent quarters. The bounce back in services sector growth from 5.7% in Q4 FY17 to 7.8% in Q1 FY18 including turn around in construction sector from -3.7% to +2.0% in same period reflects that distortionary impact of demonetisation has ebbed away.

Manufacturing sector slowed down to 10 quarter low at just 1.2% y-o-y growth compared to 10.7% in same period last year and 5.3% in previous quarter. While manufacturing sector is facing a slowdown owing to many factors including over leveraged corporate sectors and contraction in bank credit to these sectors. Deficient demand and low levels of capacity utilisation are another factors hampering the sector. Specific to this sector was the disruption caused due to GST roll out which led to destocking of inventories through various discounts offering which weighed negatively on its growth performance.

External sector is another cause for concern as the Real Effective Exchange Rate (REER, 36 Currency Basket), which measures the broad value of Indian rupee against major currency of major trading partners have appreciated by as much as 18.7% since Oct’13. Compare this to a mere 2.7% appreciation between Apr’09-Oct’13 period and this reflects that our exports are losing competitiveness internationally due to higher relative value of rupee.

While the growth numbers are indeed a cause for concern and introspection by the government as well as all the RBI and Industry, the outlook for the economy has many positives which may pull back the economy towards achieving its full potential.

Given the lagged impact of demonetisation in Q1 FY18 and the GST roll out expected to have distortionary impact in the next quarter as well, it would be prudent to look at the annual numbers as a conjoint of two halves with growth picking up from Q3 FY18 onwards.

Agriculture performance is expected to be robust again while consumption continues to be the driver. Further easing of interest rates could not only stimulate demand in the economy, it would help improve our external sector performance as well.

With RBI referring 12 companies to NCLT (National Companies Law Tribunal) for resolution of stressed assets and there is speculation that more companies may be referred to NCLT basis performance in Q4 FY18, such pro-activeness on part of RBI is a good sign.

6 Banks have also been put under PCA (Prompt Corrective Action) plan of RBI for early resolution of their NPA problem. The RBI Governor publicly mentioned in the presence of finance minister recently that Government and RBI are working closely for an early resolution of Banks NPA problem. These moves raises expectations for an early resolution of the twin balance sheet problem which could then lead to increased investment and capacity creation in the economy.

An unbiased and practical analysis tells us that it would be reasonable to expect annual GDP growth to be in the 7.1%-7.3% range for entire FY 2017-18. While this may still be below the full potential of the economy, it would be prudent to expect a movement towards the same. And yes, India will continue to be the fastest growing major economy of the world.

Disclaimer: Figures mentioned are based on government’s official release (http://www.mospi.gov.in/press-release) and author’s own calculations. Views are personal.


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