Sheen wearing off Indian growth
By Kunal Kumar Kundu
BANGALORE - India's 8.8% economic growth in the three months through June
stands out like a beacon in a world clouded by pessimism. Not surprisingly, the
government and policymakers in New Delhi are smiling from ear to ear while
anticipating growth of close to 9% by the end of the fiscal year.
A time to rejoice? Not so fast. While India is definitely one of the growth
stories, and will act as an inspiration, there is a definite tendency to go
overboard at the slightest hint of positive numbers.
More production, much less demand - that in a nutshell sums up the recently
released gross domestic product (GDP) numbers for the first quarter of the
fiscal year that started on April 1. Before we dwell on the numbers in general,
it is important to note that the
high growth number is, in itself, questionable.
An 8.82% growth in GDP at factor cost compares highly unfavorably with a 3.66%
growth in GDP from the expenditure side. A difference of 5.16% in GDP
calculation from two different angles makes the quality of the data suspect.
Source: Ministry of Statistics & Programme implementation, author's
calculation. Note: fc - factor cost; exp - expenditure
There are two important observations here.
The latest difference in growth rates (depicted by the green bars) between the
two methods of GDP calculation is the highest in the data set;
While the GDP growth rate calculated at factor cost is the highest over the
past 10 quarters, the growth rate from the expenditure side is the
second-lowest, and the current growth rate has dipped considerably compared
with the previous quarter
Clearly there is a big mismatch between production and demand data. I have
always maintained that domestic demand will fall as the effect of economic
stimulus wanes. This is clearly showing now. During the previous quarter, the
growth rate of consumer demand, or private final consumption expenditure,
plummeted to 2.65% from 5.28%. During the first quarter, it barely budged
(0.3%). More worrying, though not surprising, is that the government is failing
to fill the vacuum left by the consumers. Government demand, or government
final consumption expenditure, actually receded (minus 0.6%).
The only saving grace has been the government's ability to continue to spend on
the social sector, although the growth rate was lower at 6.7% vis-a-vis 7.6%
during the same period in the previous year.
Given the humungous (albeit one-off) revenue generated by the recent 3G
spectrum auction, the government should be in a position to carry out the
politically desired social sector spending without worrying much about the
deficit. However, the situation would change next year. Not surprisingly, the
new Direct Tax Code has not only been watered down significantly compared with
what was initially proposed (given the likely impact of revenue), its
introduction has been deferred by a year.
The biggest boost to the growth rate during the quarter under study has been
the manufacturing sector, which grew by 12.4% (3.8% in the previous quarter).
However, the Index of Industrial Production data is now showing clear signs of
slowdown.
A bigger challenge to growth during the next few quarters will come from
potential supply-side constraints, as capital formation, or gross fixed capital
formation, is showing signs of stagnation. The average growth rate during the
past 10 quarters has been only 5.87% (only 3.66% during the quarter through
June), while the average for the previous 10 quarters has been as high as
15.52%.
Even external demand (read exports) is showing clear signs of a slowdown. Given
that the United States is poised for a double dip and that Europe is expected
to see a troubled time next year as austerity measures kick in, one can't be
too optimistic on that front.
Additionally, the monsoon can again play spoilsport. In fact, the concept of a
normal monsoon is a misnomer. While India could end up having a "normal"
monsoon this year, several parts of the country are witnessing extreme
situations. For example, states like Bihar, Orissa and West Bengal are facing
severe drought. Elsewhere there is flood. The average - a "normal" monsoon. It
is, therefore, a possibility that agriculture might suffer. If that happens,
rural demand will taper off.
India, therefore can expect lower growth in the next few quarters, and full
year GDP expansion could be somewhere close to 8% and not the 8.5% to 9% that
many analysts (in government or outside) would want us to believe.
Kunal Kumar Kundu is Senior Practice Lead, Knowledge Services Division,
Infosys Technologies Ltd. The views are those of the author, whose website is http://kunalsthoughts.weebly.com.
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