The 7.5 per cent growth in Gross Domestic Product (GDP) recorded in the fourth quarter (the number for the full fiscal year 2015 is 7.3 per cent) theoretically makes India the fastest growing major economy in the world, beating China (the Chinese economy grew 7 per cent in the March quarter and 7.4 per cent for the full calendar year 2014) and far ahead of other comparable economies.
For the Reserve Bank of India (RBI), which will announce its monetary policy on Tuesday, the GDP numbers are unlikely to claim any major influence on its rate cut stance. A quarter percentage rate cut is a fair expectation.
The GDP numbers are a victory for the NDA government. The NDA has already claimed victory on achieving an economic turnaround during Narendra Modi's first year of rule. True, the status of being the fastest growing economy gives a perception boost to India before the world. But even while the prevalent mood may be one of celebration, a little caution is warranted. A check would reveal that the GDP numbers aren’t as solid as it appears just yet.
Here is what the data on Friday showed: The growth in the fourth quarter came a higher-than-expected 7.5 per cent. The big support came from manufacturing, services and construction sectors. The major drag was agriculture, which for the full year expanded by just 0.2 per cent, compared with 3.7 per cent in the whole of last year, presumably on account of poor monsoons.
But, there are three areas, where economists have raised concerns.
First, despite the feel-good factor offered by the growth number, the sharp drop in the Gross Value Added (GVA) is disappointing. A note on the GDP figures from the State Bank of India has, in fact, gone ahead and called the 7.5 per cent growth in Q4 as a bit "fortuitous", given that subsidy numbers for the March quarter had declined significantly.
"The decline in GVA is primarily attributable to the slowdown in Services, driven by a public administrative sub-segment (0.1 per cent in Q4 FY15 vis-à-vis 19.7 per cent in Q3). This was not entirely unexpected, as the government had virtually stopped spending in Q4 to meet the deficit target," SBI economists noted.
Rating agency, Care has noted that capital formation in the economy continues to decline and this is something the government needs to address in the years ahead. As Firstpost has noted before, fiscal discipline is a must but that cannot come at the cost of choking funds meant for capex expansion.
Somehow, finance minister Arun Jaitely seems to have a different notion. Given that higher public spending is key to reboot growth, the NDA's obsession with fiscal deficit numbers is something that can potentially delay the growth recovery on the ground. Hence, the decline in the GVA, led by a broad-based slowdown in industrial expansion, is indeed a worry.
Second, some economists have begun sounding caution on the sharp downward revision in the third quarter number (revised downwards to 6.6 per cent from 7.5 per cent) saying this signals the beginning of further slowdown in the second half of last fiscal year. Even though numbers of the first two quarters were also released, the revisions were, albeit, marginal.
"The downward revision in Q3 suggests some loss of momentum began in the second half of FY2015. The GVA (gross value added), however, has a different story to tell, showing a marked sequential slowdown from Q2 onwards, implying that larger growth has come on account of net taxes on products,” Reuters quoted Yes Bank chief economist, Shubhada Rao as saying.
Third, there is still a protruding disconnect seen between the GDP numbers and the high frequency macro data. This is something economists have highlighted ever since the new GDP series came into effect.
The factory output numbers for the recent months, bank credit growth and the movement trend of the stressed assets in the banking system indicate things haven't really improved. If at all, it may have worsened in some areas. The stark contrast between the GDP figures and ground reality should be questioned.
"The higher growth number in value added in sectors like manufacturing and services like finance, trade, transport, etc. have pushed growth up. However, these numbers do not adequately reflect the lower growth numbers in IIP (Index of Industrial Production) or the banking business numbers," a note from rating agency, Care, said.
According to the latest RBI data, on a year-on-year (y-o-y) basis, non-food bank credit increased by just 8.9 per cent in April 2015 as compared with the increase of 14.2 per cent in the year-ago period. Loan growth to industries slowed to 6.4 per cent compared with 12.3 per cent in the year-ago period.
On the other side, banks are sitting with bad loans of over Rs 3,00,000 crore on their books and a substantial chunk of restructured loans, which together constitutes over 12 per cent of the total bank loans given. More worryingly, fresh slippages from restructured loans too have shown an increase in the last one year.
Data sourced from corporate debt restructuring cell (CDR), a forum of banks that takes up cases of large restructuring proposals, shows that Rs 57,000 crore worth restructured assets were tagged as failed loans and accounts that failed to recover despite recasts, at the end of March quarter. This almost double from the year-ago period.
Thus, while the GDP numbers indeed offer a hope that economy is in a recovery mode, they should be seen with a bit of caution. The celebrations can, perhaps, wait.
(Data support from Kishor Kadam)
No comments:
Post a Comment