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Economic Recovery Yet To Gain Momentum

By S. Sethuraman

Official data on second quarter (July-September) for 2017-18, with GDP estimated at 6.3 per cent, may signal at best a modest revival over the first but the economy is still months away for a rebound overcoming lingering effects of the disruptive demonetisation. Additionally, GST glitches, resulting in revenue depletion from the hurriedly launch from July 1, 2017 also had a sobering effect on second quarter growth.

It is possible CSO would revise up the growth estimates of second quarter when final figures of indirect tax collections are made available. For the present, GVA (gross value added) in second quarter is put at 6.1 per cent over 5.6 per cent in the first (April-June) while GDP which includes tax receipts at 6.3 over the first quarter’s 5.7 per cent.

This seemingly improving look clouds projections for the full year, as in the first half (April-September) GDP is estimated to have grown at only 6 per cent (7.7 per cent in 2016-17) while the more widely recognised GVA at 5.8 per cent (7.2 per cent)). At present, RBI’s revised down growth estimate for 2017-18 is 6.7 per cent while the budget had assumed 7 to 7.5 per cent.

International estimates are aligned at 6.7 per cent (IMF, World Bank and OECD) and thus India would be trailing China’s projected 6.8 per cent in 2017. Finance Minister Mr Arun Jaitley, who has been putting a brave face on the economic front, now accepts the slow moving graph, hoping for the year to end with around 7 to 7.5 per cent

But what is more worrisome for him is the steep rise in fiscal deficit in the first seven months (April-October) to 96 per cent of BE, with another five months to go. His challenge is to contain the final year’s fiscal deficit at the budget target of 3.2 per cent of GDP, and earn credibility.

Surely, the axe will fall on committed development expenditure along with additional mobilisation from state undertakings and RBI surplus to bring down the mismatches between revenue and expenditure at 48 and 60 per cent respectively of the total budgeted expenditure for 2017-18.

The fiscal deficit scenario would need a re-look while framing the next budget for fiscal 2019, so as to give impetus to growth achieving its potential at 7.5 to 8 per cent while remodelling the fiscal consolidation over the medium term. The Budget, under preparation, is to be presented to Parliament in February next. It has to deliver outcomes for the hitherto under-financed social and infrastructure development and for jobs. Being a pre-poll year for the nation, populism would be fully reflected.

The second quarter data just published show a decline in agriculture to 1.7 per cent (4.1 per cent) due mainly to fall in kharif foodgrain outout (-2.8 per cent) from 10.7 per cent in previous year. Sectors registering growth of over 6.0 per cent included a few manufacturing segments, electricity, gas, water supply & other utility services and trade, hotels, transport & communication services.

Growth in core sector industries, other than coal and electricity, have not fared well. These include cement, steel and refinery throughout. IIP Manufacturing index at 2.2 per cent (5.5 per cent last year) does not indicate any strong revival. Thus, both agriculture and a vital area of industry require special focus for a healthy growth rebound. Importantly, the Services sector as a whole, contributor of 60 and odd per cent to overall GDP growth, has not been performing to expectations in major components.

Also of concern is continuing decline in private final consumption expenditure, by over 2 per cent at current prices from 11.9 per cent in previous year’s corresponding quarter. Government final consumption expenditure showed a marginal rise by Rs. 36,000 crores as compared to II quarter of 2016-17. The data reveal a steady decline on private and final consumption expenditure.

The continuing decline in rates of savings and investment is one of major domestic factors hindering a growth take-off. Private consumption at constant prices (2011-12) was 6.5 per cent in II quarter as against 7.9 per cent in Q2 of 2016-17. Government consumption fell by 4.1 per cent as against 16.5 per cent of 2nd quarter of 2016- 17. At current prices Government Final Consumption Expenditure grew only by 7.1 per cent as against 21.2 during Q2 of 2016-17.

Does growth still at 6 per cent in the first half, and with unfinished GST and other reforms in the banking sector, warrant a rate reduction by the Monetary Policy Committee meeting in first week of December? It may be premature for Government to claim that the “transitional challenges” experienced earlier have been “weathered”.

Growth prospects in the second half, with two months of third quarter already over, are not promising either, even if the economy is able to clear off pending GST issues which would perhaps improve the revenue receipts for the year. Still, the fiscal gap in the year may not be fully covered to remain within the targeted 3.2 per cent of GDP.

Price pressures have been building up over the last two months and partly attributable to the multiplicity of GST rates, now intended to be simplified, besides seasonal rise in vegetables and fruits. CPI and WPI have been edging upward over the last two months. CPI may not remain long within the 4 per cent benchmarked for stabilisation.

This is primarily due to rise in international commodity prices, especially oil, and the forecast average price for 2018 is 60 dollars a barrel. India, the largest importer, would be hit badly with a worsening of the Centre’s fiscal outgoes and external balance as CA deficit would rise to 2 per cent of GDP. This calls for a vigorous export drive in the environment of expanding global trade and given the need to contain CAD within manageable limits.

US FED is set to raise the Federal Funds rate above the current 1.5 per cent though FED is pursuing a policy of gradual increases as warranted by incoming data on inflation with the US economy growing steadily at an annual rate of 3 per cent from mid-2017 and unemployment rate at 4.1 per cent, a return to pre-crisis level. (IPA Service)

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