The Modi government will be a lot relieved that GDP growth for the second quarter of 2017-18 has rebounded to 6.3 per cent from a worrying 5.7 per cent in the first quarter. It has also broken five consecutive quarters of downward slide for the economy, for which the government had been criticised from all quarters. It was quite evident that the slide was caused by two major disruptive measures – demonetisation and the implementation of the Goods and Services Tax (GST). Among these, at least demonetisation was seen as something avoidable since its harmful spell was cast on the economy for more than just a quarter.
However, the new GDP numbers released by the statistical department on Thursday show that much of the impact of demonetisation has waned. Moreover, the pre-GST hoarding and a halt in production that had led to a drop in manufacturing growth in the previous quarters has somewhat been stemmed. This becomes evident in the gross value-added numbers, which are said to be better instruments to assess the health of the economy, since they take into account the supply side of things.
The gross value added improved to 6.1 per cent in the second quarter from 5.6 per cent in the first quarter largely on account of revival in industrial activity.
The high leverage of corporates and non-performing assets in the banking system are issues that still cast a shadow on growth. Photo: PTI
Industrial growth improved to 5.8 per cent from 1.6 per cent backed by a sharp rebound in manufacturing and mining sector growth, suggesting reduction in GST-related hiccups. According to Crisil, a broad-based improvement in the Index of Industrial Production (IIP) by 3.1 per cent in the second quarter versus 1.6 per cent in the first quarter had hinted at this trend. Services growth, however, slowed to 7.1 per cent compared with 8.7 per cent. Agriculture growth, too, was subdued at 1.7 per cent on account of last year’s high base and some moderation in kharif production this season, adds Crisil.
But much of the cheer ends there. On the demand side, private consumption growth moderated to 6.5 per cent from 6.7 per cent, suggesting the improvement in the manufacturing growth was largely the result of a re-stocking exercise.
Exports came in flat at 1.2 per cent. The biggest worry, however, was on the part of investments, which have been sluggish for a long time. Investments continue to remain subdued, declining to 28.9 per cent of the GDP compared with 29.8 per cent. The industrial segment is not out of the woods yet, with low capacity utilisation ruling the roost in most sectors.
The high leverage of corporates and non-performing assets in the banking system are issues that still cast a shadow on growth. Uncertainties on account of the GST can still cast a shadow on growth. Therefore, it is better to hold the cheer for now, and wait for growth to show a sustained increase in the next three to four quarters.
Ratings agencies have maintained this sort of caution: while Crisil revised its GDP growth forecast for 2017-18 from the earlier 7 per cent to 6.8 per cent, ICRA said that growth for the current fiscal would be in the range of 6.7 to 6.8 per cent.
A near-normal monsoon, softer interest rates and inflation, and the implementation of the seventh pay commission by states, would become helpful.
Despite this cheer, the markets, notably, have been in freefall on both Thursday and Friday. The BSE Sensex fell 453 points on Thursday and a further 316 points on Friday, on factors that it deemed as long-term worries. For one, the government’s fiscal deficit touched 96 per cent of the full-year estimate as of October-end, raising fears of a slippage in the current financial year.
The reasons for this were higher expenditure and lower-than-expected non-tax revenues. At the end of October last year, fiscal deficit was only at 79.3 per cent. Meanwhile, the State Bank of India (SBI) raised the interest rate on bulk deposits of more than Rs 1 crore by one per cent, effective November 30, signalling that the excess liquidity in the banking system that occurred due to demonetisation is, perhaps, drying up.
It had earlier reduced the rates to discourage more investments, when it was flush with liquidity post the currency ban.
Considering all these factors, combined with rising crude oil prices, the situation is still not hunky dory on the economic front, and calls for a sustained effort to pump-prime the economy, while maintaining a sharp tab on expenditure.