IASbaba’s Daily Current Affairs – 9th January, 2017Devendra Vishwakarma
The Slowing Economy
No doubt, India’s growth momentum has slowed down as advanced GDP estimates and gross value added (GVA) for the current fiscal year from the Central Statistics Office clearly revealed the extent of the slowdown.
- The GDP growth is now pegged at 7.1%, as compared to 7.6% in 2015-16.
- The GVA is forecasted to expand at 7.2% in 2016-17 as compared to 7.2% last year.
- From the key areas of economy:
- Mining and quarrying is estimated to shrink 1.8% in 2016-17 after expanding 7.4% last year.
- Utility services like electricity, gas, water supply and others — collectively an indicator of broader economic activity — is slowing to 6.5% from 6.6%.
- Manufacturing and services, the two key engines of economy, are losing momentum, faster than anticipated.
- The growth projections for services such as financial, insurance and real estate is at 9% compared to last year’s 10.3%. Other services such as trade and telecommunication will grow 6% as against 9% last year.
- Manufacturing will grow 7.4% versus 9.3% previous fiscal.
- Construction – the biggest creator of jobs – will grow at 2.9% against 3.9% last year.
- It is the lowest growth forecast in three years.
- However, there is some hope as the data predicts that ‘normal monsoon’ shall expand ‘agriculture, forestry and fishing’ sector at 4.1% this fiscal compared with the previous period’s 1.2%.
- FM had projected in April that growth could accelerate this year to 8-8.5% subject to normal monsoon. It stemmed from the reversal in downturn trend wherein
- Excise duties jumped 46% as against the target of 12%
- Corporation tax was up by 21% as against budgeted 9%.
- Service tax was high by 27% against the conservative target of 10%.
- The projections have been made based on data from April to October only and don’t take into account the post-demonetisation impact.
Why only till October?
- The policy of demonetisation brought lot of volatility in the figures in that time period, especially in sectors of financial, insurance, real estate and professional services.
- Hence, it was better to not factor in the post demonetisation growth period which saw mostly predictions and not actual ground level data.
- For example, there has been growth in VAT collections in November 2016 in many states. Counting in on such extreme data may not provide a true picture.
- Also, the budget is going to be presented earlier, hence, there was a need to bring in early the GDP growth data forecast.
Reasons for slowdown
- The slump is mainly due to slowdown in manufacturing, mining and construction sectors where the manufacturing sector has been under-performing for nearly two years now.
- There has been sluggish environment of investments, especially private investments.
- Shortfall in revenue from disinvestments as only Rs. 23,529 crore were raised against expectation of Rs. 56500 crore.
- The farm output was low due to past two drought years.
- Higher subsidy expenditure on food, petroleum and fertiliser, right from the beginning of fiscal year.
- Additionally, the global economy is also facing a slowdown and India is not insulated from its effects.
- Preliminary rabi data show that the total area sown under the rabi crop as on January 6 stood at 602.75 lakh ha, up 6.5% from last year. If farmers can pass over the acute cash shortage and ensure that the sowing translates to strong growth in output, the increase in rural consumption can provide some moderation from the slowdown.
- Also, the rise in indirect taxes might provide cushioning effect to absorb the shock to the economy due the disruption caused by demonetisation.
- The overall growth rate of over 7% is predicated on enhanced public expenditure (12.8%, against 6.6% in 2015-16), manifested in pay panel payouts.
- However, most private economists have pared India’s growth forecast to 6.3-6.4% for the 2016-17 fiscal year, citing the impact of the government’s demonetisation move, which they reckon would linger for one more year.
- As a worst-case scenario, India could be back to the 6% growth levels of 2014-15 this fiscal, with the effects of the downturn dragging into 2017-18.
- This could happen in the event of weak consumer and investor sentiment dragging each other down with the consumer holding on to cash (precautionary demand for money).
- Therefore, the economy may not bounce back to normal even after bank has sufficient currency and the RBI lowers the repo rate. Instead, the banks should finally be willing to lend rather than park funds in G-Secs. On the demand side, job uncertainties could dampen demand for credit even if rates fall.
- The Centre must prepare for a spending push in the Budget, both in physical and social infrastructure, to redress the demand compression.
The GDP estimate is a vital input for finance minister’s budget on February 1. Until last year, the government’s statisticians would wait for GDP data for the quarter through December before putting out full-year estimates. But the announcement of the GDP estimates had to be made early keeping in mind the advanced budget in 2017.