So far, so good

There are clear indications that the Indian economy is on an upswing. A fourth quarter GDP growth rate of 7.9 per cent clearly suggests that the positive impulses in India’s economy cannot be underestimated. This rate of growth also bucks a trend since 2012-13 of the first and second quarter growth rates being higher than the latter two quarters. An above-normal monsoon forecast for 2016-17 seems to suggest that 7.6 per cent growth in 2015-16 (7.2 per cent in 2014-15) will be improved upon, with agriculture likely to lead a demand revival. A Q4 manufacturing growth rate of 9.3 per cent (7.3 per cent for the entire year) stands out as a bright spot, apart from the traditional buoyancy in services. That said, a Q4 growth of 2.3 per cent in the farm sector too comes as a relief for an economy that has been shackled by sagging rural demand. Consumption, rather than investment, is clearly the growth driver: private consumption grew 7.4 per cent in 2015-16 (6.2 per cent in 2014-15), whereas gross fixed capital formation was up 4.9 per cent (3.9 per cent in 2014-15). A spurt in rural demand as well as the prospect of the Seventh Pay Commission being implemented later this year (though the Centre seems to be in no hurry) is likely to lift capacity utilisation in consumer goods across the board — and this could bridge the rural-urban growth gap. With industry operating at about 75 per cent capacity, there is scope for output to match demand at least in the short run.

India’s immediate growth prospects look pretty good, but the moot question is whether this scenario is here to stay. Investment would have to pick up to match demand, failing which we may once again be faced with high inflation. Gross fixed capital formation has fallen steadily as a proportion of GDP over the last few years, and what’s worse, even more sharply since the second quarter of 2015-16. The Centre should reconsider its approach of squeezing expenditure to meet fiscal targets , and focus on infrastructure — its spending was up 2.2 per cent in 2015-16, against 12.8 per cent in the preceding fiscal. While the move to marginal cost-based lending rates is expected to spur investment , both the Centre and the RBI should keep a watch on whether the NPA regime, for all its positives, affects lending to crucial sectors such as infrastructure, steel and textiles.

A focus on agriculture is indispensable for sustained, inclusive growth. In a May 2015 paper on how the monsoon impacts agriculture, the RBI observes: “What is revealing is the waning sensitivity of agricultural production to positive monsoon shocks over time.” The sanguine effects of an above-normal monsoon cannot be taken as a given; spatial and temporal distribution as well as extreme weather events, can play a big role. In sum, the farm sector needs to move from a trend growth rate of less than 2 per cent now to 3.5-4 per cent for India’s growth to be a long-term success.

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