Growth numbers present a gloomy picture

The growth numbers for the financial year 2016-17 are in and they aren’t looking good. The fourth quarter Gross Valued Added (GVA) growth at basic prices slumped to 5.6%, down from 6.7% in the previous quarter and 8.7% in Q4 of the previous fiscal. The slowdown brought the yearly GVA growth to 6.6%, down from 7.9% for the previous year. The 2016-17 GDP (which loosely is GVA plus indirect taxes) came in at 7.1%. The numbers are significant on several counts.

First, the data has been compiled using the new series of Index of Industrial Production (IIP) and Wholesale Price Indices (WPI). The revision of base year to 2011-12 is in sync with the GDP base and the Consumer Price Index (CPI) base, which is currently the official inflation index. Earlier, CPI was calculated with the base year as 2011-12 and WPI were calculated with the base of 2004-2005. To that extent, we now have base year uniformity in these two indices which are used to derive the growth numbers.

Second, the lower growth rate in the fourth quarter is broad-based and witnessed across most of the sectors. Agriculture GVA was down to 5.2%, manufacturing came in at 5.3%, trade, hotel and transport at 6.5%. Besides, there has been a negative growth in construction of 3.7%. The numbers support anecdotal evidence that demonetisation has hurt growth, even if this is argued to be in the short term. The sectors impacted the most are those which have a critical dependence on cash transactions. Demonetisation thus has been a step back for the economy with at best uncertain advantages from the three forward steps that were sold in favour of the move – the fight against black money, against fake currency and in favour of a less-cash economy.

But beyond that obvious reading, the economic performance reveals some interesting features when studied from the demand side and the supply side of growth. The demand side is represented by consumption and investment of the government and private sector, and exports. The supply side growth reflects the measurement of economic activity consisting of agriculture, industry and services. Technically, the supply side is called GVA at basic prices, which reflects the value-added from various economic activities.

It is pertinent to note that the 7.1% GDP growth witnessed in 2016-17 has been almost solely led by government consumption (or demand), which recorded an increase of 20.8% as compared with 3.3% in 2015-16. In effect, this means that the government has been driving the economic engine with increased consumption financed by borrowings. This cannot be a healthy sign.

This is corroborated by the supply side with an elevated level (an increase of 11.3% as compared with a rise of 6.9% in 2015-16) of activity recorded in public administration, defence and other services.

Slowdown in investments

Further, there has been a massive slowdown in investment in terms of Gross Fixed Capital Formation (GFCF), both by the government and the private sector, GFCF grew a mere 2.4% against 6.5% in 2015-16. The deceleration of growth from the supply side has been contributed by lower growth in manufacturing, mining, construction, trade, hotel and transport, and financial services. Remonetisation to some extent could take care of the deceleration in these sectors where cash transactions predominate. But the malaise is probably deeper. And the question that remains is: how will the government revive the investment rate?

Industry captains have an immediate answer, and this has begun to be voiced in the nature of demand for a policy repo rate cut by the Reserve Bank of India (RBI). The clamour for a policy repo rate cut is also strengthened this time as inflation is around 3%, lower than the median RBI target of 4%. One also suspects that the pressure from the government is building on the members of the Monetary Policy Committee (MPC) for such a cut as the government has held a separate meeting with MPC members who are not from the RBI.

This raises some doubts about the intentions. The purpose of a government-initiated meeting with experts who are meant to be independent, and that too right on the eve of the MPC resolution which was due in a few days (June 7), is suspect. With a chief economic adviser and a battalion of economic officials at the government’s disposal, the government does not need a brief from the MPC members and nor should it offer one. This indicates pressure tactics.

The simple fact is this: the revival of growth from the demand side critically depends on a U-turn in investment demand by the private sector. Time and again it has been clarified by the RBI that interest rate cannot be the answer to reviving private sector investment demand. It has been adequately researched that public/ government investment plays a strong complementary role to private investment.

Therefore, both the central and state governments should focus on eliminating revenue deficits and allocate borrowed resources in quality public investment, keeping in view the return on investment. In short, spend less on yourself and more on building economic assets for the nation.

To conclude, the two sides of the growth story reveal that to some extent remonetisation could take care of the slowdown in growth. However, the sustainable solution is an elevated level of investment with fiscal rectitude of the government and a clean balance sheet by the private sector. And these cannot be achieved by a policy repo rate cut.

(Pattnaik is a professor at SPJIMR; Rattanani is editor, SPJIMR)
(The Billion Press)