Be cautious with GDP boost

The economy has given out a positive signal after a series of negative turns over an extended period. Official data released last week have shown that the GDP grew at 6.3% in the July-September quarter after five consecutive quarters of slowdown. The uptick has been especially noted because it came after the three-year low of 5.7% in the last quarter. The rebound has provided relief as some indicators of the economy have shown signs of strength. Manufacturing, which is among the most important sectors, has led the recovery with a 7% growth. Construction, another sector which provides employment, also showed improvement over the previous quarter. The services sector has shown surprisingly high growth at 9%. There are other indicators like gross fixed capital formation (GFCF) and fresh investment which rose from the sluggish levels of the past quarter and year to lift the overall growth rate into the 6 plus bracket.  

But there are conditions and circumstances that call for caution, and the importance of the growth uptick should not be exaggerated. The figures are provisional and based on the results of large companies. When the data get revised later, taking into account the results of small and medium companies which have been hit hard by demonetisation and the GST, the picture is likely to be less rosy. The spurt in production has partly been attributed to the need to meet an early festival season demand and to rebuild stocks after de-stocking before the introduction of the GST. Both are one-off events. The published data should actually cause concern over the performance of some key sectors. The growth of the farm sector, which sustains the majority of the rural population, has slumped to 1.7% from 2.3% despite a good monsoon. The foodgrain output has declined. Export performance is indifferent. Consumption spending by households is slower at 6.5% than the 6.6% of the previous quarter.  

It is, therefore, too early to assume that the economy has decisively turned the corner. There are serious challenges that make sustaining the momentum difficult. Private investment is not enough to keep growth rate at the present level. The scope for public investment is limited because fiscal deficit has already crossed 96% of the budgeted figure for 2017-18. Oil prices have moved up in the past few weeks and may rise further. Inflationary pressures may increase and the RBI's monetary policy stance may not be conducive to growth. Tax collections may fall in the near future, as a result of the  transition to the GST system. So, the conditions for high and steady growth are not there, yet.