Back to basics: on the dip in GDP growth (The Hindu - 02 June 2017)

The dip in GDP growth in the January-March quarter points to the need for a policy reboot

India’s economy, measured by the gross domestic product, grew at 7.1% in 2016-17, the slowest pace since the National Democratic Alliance government came to office in 2014, and significantly lower than the 8% growth clocked in 2015-16 (revised data). On the face of it, this is in line with the estimates put out by the Central Statistics Office in early January and at the end of February. A top government economist has lashed out at ‘messiahs of doom’ who had predicted a 2% decline in growth due to the Centre’s decision to demonetise ₹500 and ₹1,000 currency notes last November. But scratch deeper, and those naysayers don’t appear to be too far off the mark. Growth in the final quarter of 2016-17 was just 6.1%, all of 1.8 percentage points lower than the 7.9% recorded in its first (which decelerated to 7.5% and 7% in the second and third quarters, respectively). In fact, the only reason the 7.1% estimate has held up is because growth for the previous quarters was revised upwards. Finance Minister Arun Jaitley is, however, right when he points out that growth had already been slowing down, so ascribing the entire downturn to demonetisation is not fair. Yet, whichever way one looks at it, the note ban seems to have exacerbated the problem, particularly for India’s large informal economy that the poor depend on, as even the World Bank has now noted.

Consider these underlying trends. Discounting the healthy growth in GVA (gross value added) from agriculture and government spending, real GVA grew by just 3.8% in the fourth quarter, down from 8.4% in the first — indicating that private spending and investment collapsed. Private consumption grew at the slowest pace in five quarters, even as construction (with a high dependence on informal/migrant labour) and manufacturing activities dipped sharply. Industry has renewed pleas for the Reserve Bank of India to cut policy rates and shift back to an accommodative stance. While lower inflation and growth may soften the RBI’s outlook, there is little that monetary policy alone can do at this juncture to revive animal spirits. Banks, the primary beneficiaries of demonetisation, are flush with funds but credit growth is at multi-decade lows — and the twin stress on banks’ and their borrowers’ balance sheets is spreading to other sectors such as telecom. With the direction of global headwinds remaining uncertain, growth in government spending budgeted to be lower this year compared to last year, and private investment virtually absent, these GDP numbers should serve as a reality check. Returning to the 8% growth mark is going to be a big challenge. While the government has vigorously underlined its reform achievements of the last three years, such as the Goods and Services Tax that rolls out in July, a mission-mode reforms reboot is urgently needed. And that can only begin if the problem is suitably acknowledged by policymakers.