Growing CAD, weak bank deposit growth, and fiscal deficit surpassing estimates cause for worry.
The Central Statistics Office (CSO) recently released the Second Advance Estimates (2nd AE) for 2017-18, and the 3rd quarter GDP growth figures for October-December 2017.
The new numbers have added some cheer to the disappointing state of affairs in the economy. The aggregate gross domestic product (GDP) registered a healthy growth of 7.2 per cent, while the gross value added (GVA) at constant prices posted a growth of 6.7 per cent (Q3: 2017).
To take a broader view, the 2nd AE (2017-18), an annual estimate, pegs GDP growth at 6.6 per cent, as against 7.1 per cent for the previous year. The 2nd AE is computed using 9-10 months of data, which includes the Q3 period. What is the emerging macroeconomic picture from these estimates? And is the economy gradually moving out of troubled times?
The big picture:
GDP numbers are hard to interpret, especially when the estimates are based on a host of indicators and the indicator set changes with each round of revision. The difficulty is compounded by the fact that sometimes the CSO does not provide a consistent picture of the state of proxy indicators used to compute the growth in each sub-sector.
For example, the CSO circular released on 28 February does not provide information on the growth of proxy indicators for the GVA of financial, real estate and professional services for the October-December quarter. Both the 2nd AE and Q3 numbers are projections based on a set of indicators for each sub-sector of the economy. Since the period of 2nd AE also includes the period of Q3, it is useful to study both numbers in conjunction.
The 2nd AE projects the annual growth (2017-18) of agriculture at 3 per cent, and mining and quarrying at 3 per cent, with the GVA growth for the manufacturing sector pegged at 5.1 per cent. For these sectors, the projected growth rate is lower than that in the previous year (2016-17).
In contrast, the growth rate for construction is projected at 4.3 per cent, trade, hotels & transport at 8.3 per cent, and that for the finance and real estate sector at 7.2 per cent. For these sectors, the 2nd AE is higher than that for the previous year.
The emerging picture seems to indicate that services have shown a much better performance than the industrial sector, which is eventually leading to a near 7 per cent growth trajectory.
The Q3 numbers provide a snapshot of this growth momentum as they capture economic activity in the most recent period. The Q3 figures also indicate a marked improvement in growth rates for various services. The improvement in the construction sector, from 2.8 per cent to 6.8 per cent in October-December, is an encouraging development as its poor performance was a matter of concern.
Is the economy coming out of the woods?
Given the broad-based growth, especially in the services sector, the emerging picture does suggest a recovery to a sustained path.
However, three trends are a cause for concern.
First, the muted growth in exports and buoyant one in non-oil, non-gold imports in recent months cast a shadow via a rise in the current account deficit (CAD). On the expenditure side, goods and services exports posted a growth of 6 per cent, while imports registered a double-digit growth of 13.5 per cent. While the surge in imports is a positive reflection of a pick-up in domestic consumption activity, impetus is needed to raise the trajectory of exports, particularly when the outlook on global growth and trade is turning favourable.
The monthly data for merchandise trade show import growth continued to surpass export growth in January. If the trend continues, the contribution of “net exports” to the overall GDP may drop in the coming quarters.
Second, a key proxy for GDP financial services is the growth of bank deposits, which has been growing at an anaemic rate. On the other hand, incremental credit has outpaced the accretion of deposits, reflecting in an uptick in the credit-deposit ratio. Attempts towards deposit mobilisation would be required to sustain a pick-up in credit growth. If the pace of deposit accretion does not pick up, it may affect the nascent recovery seen in the credit off-take in recent months.
A weak growth in deposits has resulted in banks raising their deposit rates. While the trend is attributed to competition from insurance and mutual funds, the trajectory of incremental bank deposits and credit in forthcoming quarters would be a key factor in determining the contribution of financial services GVA to the overall growth.
Third, with fiscal deficit reaching 113.7 per cent of the target in the April- January period, one can reasonably expect government expenditure to slow down in the last quarter of the current fiscal. While the biggest driver of growth was government spending in the last few quarters, we may not see that trend continuing in the last quarter of this fiscal.
The interest rate question:
Finally, what do these numbers imply for the RBI’s interest rate decisions? With growth concerns apparently fading, we may see a hawkish stance on interest rates sooner than later. This may not be in the interest of the investment revival we have seen in recent months.
Radhika Pandey, Amey Sapre and Pramod Sinha are at the National Institute of Public Finance and Policy (NIPFP), New Delhi.