So the Narendra Modi government gets a nice anniversary present. Three days after it completes one year in office, numbers put out by the Central Statistical Office (CSO) show the economy grew 7.3 per cent in 2014-15 against 6.9 per cent in 2013-14. It's quite clear now that the economy is on the mend.
As this report shows, the sectors which have done much better in 2014-15 than in 2013-14 are manufacturing, the utilities (electricity, gas, water supply etc), construction (though there has been a decline quarter on quarter) and financial, real estate and professional services.
Questions will be raised about the manufacturing growth figure of 7.1 per cent since the index of industrial production (IIP) showed a growth of just 2.3 percent. Remember, however, that the IIP figure relates only to the organised sector and to goods shipped out of the factory gate. The national accounts figure covers the unorganised sector as well and is about gross value added at basic prices. It also now includes some manufacturing-related services which were earlier put in the services basket.
Are the better numbers a sign that this government has managed the economy well? Certainly the government can take credit for some of the decline in inflation, though the fall in global oil and commodity prices also played its part. This has revived the consumption story – at 60.1 per cent private consumption as a percentage to GDP in 2014-15 is slightly better than in 2013-14 when it was 59.7 per cent.
According to Devendra Pant, chief economist at India Ratings, the fact that food inflation did not shoot up in March and April after the unseasonal rains has given some confidence to the rational consumer. There is also a budding investment recovery – gross fixed capital formation (GFCF) at constant prices grew 4.6 per cent against 3 per cent in 2013-14. The improved business environment is responsible for this.
Yet, there are areas of concern that need to be addressed for 2015-16.
The consumption story may be recovering, but it is still a source of worry, with the numbers fluctuating quarter on quarter. Private consumption dipped to 59.7 per cent of GDP in Q4 from 61.1 per cent in Q3.
State Bank of India's chief economic advisor Saumya Kanti Ghosh points out in an Ecowrap report that growth in both per capita gross national disposable income (GNDI, or income available for spending after paying taxes) and in per capita private final consumption expenditure (PFCE) has declined. While per capita GNDI growth has come down to 8.8 per cent in 2014-15 from 12 per cent in 2013-14, per capita PFCE growth has fallen to 9.8 per cent from 13.8 per cent.
"For every drop in GNDI, the PFCE has dropped more sharply," says Ghosh, who finds the contraction in demand glaring.
So a close watch needs to be kept on this – revival of demand is the key to a more sustained recovery. A lot will depend on inflation (the monsoons could prove a wild card) and interest rates (2 June will tell us how this will pan out).
Pant notes that the focus has to be on reviving domestic demand – global trade recovery is expected to be weak. In fact, the numbers show a quarter on quarter decline in exports as a percentage of GDP – from 23.9 per cent in Q1 to 21.2 per cent in Q4.
Investments may have grown a bit, but at 28.7 per cent of GDP, the investment rate is lower than the previous year's 29.7 per cent. At a press briefing on the state of the economy on 26 May, chief economic advisor Arvind Subramaniam noted that though the number of stalled projects has come down, there's been no pick up in fresh private investments.
Industry is hoping for public investment to lead the way (Subramaniam has been talking about this), but the compulsions of fiscal consolidation may prove a hurdle. Business sentiment has improved, but are still subdued and concerns on this front need to be addressed.
The agricultural story is weak – gross value added (GVA) in the sector has been declining quarter on quarter, with a 1.4 per cent decline in Q4, which has to do with the unexpected rains. For the coming year, the uncertainty over the monsoons is a source of worry. Agriculture accounts for only 15 per cent of GDP and may not pull down the aggregate numbers hugely, but rural demand still drives overall demand and so is an area of concern. A likely dip in food production could spike inflation which too could affect demand.
The government can take heart at economy having turned the corner but it will be a while before it gets back into the pink of health. That will require a lot of nurturing. One wrong step could spoil the story again.
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