Not in a sweet spot

By pegging the rate of growth at 6.5 per cent in 2017-18, the first advance estimates of GDP suggest that the economy is not doing too well. Some facts cannot be wished away: first, agriculture growth is likely to be down to 2.1 per cent this year, against 4.9 per cent in 2016-17, while manufacturing growth too has decelerated to 4.6 per cent for this fiscal, against 7.9 per cent last year. In the case of agriculture, growth at current prices is pegged at just 2.8 per cent or marginally higher than the real farm sector growth, whereas in the case of manufacturing and services, nominal growth rates are much higher. This indicates a loss of relative purchasing power in the rural sector, with political economy implications. Second, with oil at $68 a barrel, both the fiscal and trade deficits are likely to come under pressure, with inflationary implications. Imports are expected to rise by 10 per cent this year, against 2.3 per cent last year, while export growth is pegged at 2016-17 levels of 4.5 per cent. Third, the CSO data points to rising growth in the ‘valuables’ sector, despite benign rates of inflation — an indication that spending is going into unproductive channels. The Centre needs to look into why this is happening.

The finance minister is right in asserting that GST as well as improvement in ‘ease of doing business’ will yield gains in the medium term. Bank recapitalisation will improve banks’ capacity to lend. Indeed, growth in gross fixed capital formation has been picking up since Q4 of 2016-17, when it had plunged into negative territory, perhaps as a result of demonetisation (investment growth also fell between the second and fourth quarter of 2016-17). However, growth in private consumption spending has petered out from above 10 per cent levels in Q3 of 2016-17 to an estimated 6.3 per cent in 2017-18. Going forward, it is essential that demand deficiency in the economy is addressed, to ensure that investment picks up. While investment growth, pegged at 4.5 per cent this year, marks an improvement over 2.4 per cent in 2016-17, the five percentage point decline in investment rates (investment as a share of GDP) from above 34 per cent in 2011-12 needs to be reversed. The upcoming Budget has its task cut out: spur investment and jobs.

It is, however, constrained here by poor revenue collections. Analysts expect the fiscal deficit to breach the 3.2 per cent target for 2017-18 by about 30 basis points, owing to a shortfall in output and tax collections, the latter a result of industrial slowdown and GST rollout. The finance minister is faced with a hard trade-off between meeting the fiscal deficit target of 3 per cent for 2018-19 and giving an intelligent stimulus to the economy. With monetary policy, too, losing elbow room to cut rates further, the last full Budget of this government becomes all the more important as a growth driver.

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