Economic Growth: Light at the End of the Tunnel?

demonetisation

The first quarter FY 2018 GDP growth rate which came in at 5.7 per cent was a shocker. It was expected that there would be a minor recovery in the growth rate after the demonetisation-induced slump of the last quarter of FY 2017. The dip in manufacturing growth to a mere 1.2 per cent brought the growth rate crashing. Going by the present trends, the actual growth rate for FY 2018 would fall far short of the RBI’s projection of 7.3 per cent and is likely to be somewhere near the lower band of Chief Economic Advisor’s growth projection of 6.75 per cent to 7.5 per cent. In the short term, achieving the fiscal deficit target of 3.2 per cent of GDP would be challenging. Job generation, tax revenue buoyancy, public expenditure programmes…all depend on revival of growth rate. So the relevant questions are: Why is growth slowing down? When will growth revive?

THE BOOM YEARS

Let us look at the issue from a longer time horizon. During 2003-11, India’s GDP grew by a record 8.4 per cent. The Great Recession of 2008 didn’t impact India much. The Indian economy staged a ‘V’ shaped recovery after the minor dip in 2008-09. It is important to note that the benign global economic environment of 2003-07 facilitated fast growth in all Emerging Markets. The record global growth of 4.5 per cent during this period was a rising tide lifting all boats. Sustained annual export growth of above 20 per cent aided India’s high GDP growth rate during those boom times.

THE DOWNTURN

The Great Recession of 2008, the European debt crisis of 2010 and 2011, the ‘Taper Tantrums’ of 2013, the commodity crash of 2014 and Brexit impacted the global economy severely and pulled down the growth of Emerging Markets too. International trade slumped, affecting exports. The effect was felt in India too. India’s growth rate for the seven-year period 2011-17 was only 6.65 per cent. Is this sub-seven per cent growth rate a new normal for India? The sharp revival of growth in India during 2009-11 was aided by unprecedented fiscal and monetary stimulus. The savage cut in interest rate by the RBI and the massive fiscal stimulus including the farm loan write-offs, which aided the ‘V’ shaped recovery, led to high level of inflation, which threatened to get entrenched. This forced the RBI to tighten the monetary policy; and the government was forced to cut down on public expenditure to achieve fiscal consolidation. Monetary tightening and fiscal consolidation impacted growth.

The second half of FY 2017 was affected by demonetisation. The slump in the first quarter 2017-18 growth was mainly caused by the dip in manufacturing growth to 1.2 per cent. This was largely due to the destocking impact triggered by GST. Destocking by traders led to poor orders for manufacturers which, in turn, impacted production. This can be expected to reverse in the second quarter.

LEADING INDICATORS

Some leading indicators suggest that growth is recovering. For instance, automobile sales, regarded as a significant leading indicator, are picking up strongly. Automobile sales in August were an all-time high. Passenger vehicles, commercial vehicles and two-wheelers have posted impressive double-digit growth. Another major positive indicator is the turnaround in exports, which have recovered to 10.29 per cent in August from 3.94 per cent in July. If this trend in auto sales and exports sustain in the coming months, that would augur well for recovery of GDP growth in the second half of FY 2018. Hopefully, GST-related disruptions too would be behind us soon. It appears that even though the target of 7.3 per cent growth for FY 2018 would be missed, economic recovery is on the cards.

(The author is Investment Strategist, Geojit Financial Services)