Modi can improve India's GDP if he shifts focus from beef and Hindutva to reforms
When the GDP growth numbers for the third quarter of 2016-17 came in March this year, there was a huge surprise in store. While many had expected demonetisation to impact growth and drag it down by a minimum one per cent if not more, data showed growth had defied critics and stood at seven per cent.
There were at least a few who said then, the data may not have reflected the full impact of demonetisation, especially the pain in the informal sector, which comprises over 80 per cent of all employment.
Now, the government data for the fourth quarter (Q4), ended March, proves that it was premature to shrug off the impact of demonetisation, when it pegged the GSP growth to be at 6.1 per cent, compared to eight per cent a year ago, and lower than the consensus of economists that it would be in the range of 7.1 per cent.
The GVA (Gross Value Added or the measure of the value of goods and services produced in an area, industry or sector of the economy) in the fourth quarter came in at a lower-than-estimated 5.6 per cent, while the consensus was that it would be somewhere around 6.8 per cent.
The finance minister has been quick to play down the impact of demonetisation on the GDP numbers, saying a host of other factors, including slowing global growth, was responsible.
An analysis by HSBC Global Research shows GVA was hit by a contracting construction sector along with weaker growth in manufacturing, financial services and trade.
Construction growth contracted for the first time in three years. The GDP slowdown, meanwhile, was a reflection of the negative investment growth and slowing private consumption. Overall, the GDP for the full year 2016-17 stood at 7.1 per cent compared to eight per cent a year ago.
According to CARE Ratings, the annual GDP growth in 2016-17 was dragged down primarily by mining, quarrying and construction, along with services. The economy was expected to outperform in the fiscal year, with favourable monsoon and wage increase post-implementation of the 7th Pay Commission, which was expected to spur consumption in the second half of the fiscal.
However, demonetisation had temporarily slowed down economic activities in the third quarter due to cash crunch, it said. The manufacturing sector, which has been in the limelight for some time now after the government’s high decibel "Make in India" campaign, had witnessed a drop in the growth, while the services like trade and transport were adversely affected.
Banking sector, however, benefitted from demonetisation with higher bank deposits and liquidity in the banking system. Another positive factor is that agriculture has been strong, led by good rains after a two year drought.
What’s in store for 2017-18?
HSBC expects GDP growth to be flat at 7.1 per cent this financial year too.
This seems increasing the possibility, given the fact that the private investment cycle does not show any sign of kickstarting any soon, and the slowdown in manufacturing, other than in passenger vehicles and FMCG, is expected to continue.
Even the NITI Aayog has said that for India’s GDP to grow at over eight per cent, manufacturing has to grow at 12-14 per cent, from as low as 7.9 per cent in 2016-17. The implementation of GST will also cause uncertainties in the initial months, and could become a drag on the economy.
Only a prudent mix of government spending (which, thankfully, is already on a higher trajectory) and a boost in business confidence to invest more, can take the GDP to levels beyond eight per cent as targeted by the government.
For that to happen, the government should discourage its current discourses around beef and Hindutva and focus on taking some of its proposed reforms such as cleaning up the banking sector to completion.
(Courtesy of Mail Today.)