Even at 7.6% in FY16, the economy remains as fragile
Though ratings agency Crisil has projected an FY17 GDP growth of 7.9% on top of this year’s expected 7.6%—that’s a steady clip from 6.9% in FY14—it would be naïve to think the economy is on a path to sustained recovery; so yes, it still needs a helping hand from the government. Crisil’s 7.9% is, in any case, contingent upon a normal monsoon, failing which it is forecasting 7.3%. Even if you don’t take into account the obvious problems with FY16 data—manufacturing growth, according to CSO, accelerated from 9% in Q2 to a whopping 12.6% in Q3 at a time when IIP slowed—even the numbers that CSO released on Monday suggest a fragile economy. While the Q2 problem of nominal GDP growing at a lower rate than real GDP has, fortunately, gone away in Q3, the gap between real and nominal GDP growth is falling in a big way—in FY13 and FY14, nominal GDP growth was more than double that of real GDP while in FY16, it is projected to be just 100 bps higher; as compared to the budget estimate of 11.5%, nominal GDP is projected to grow by just 8.6% in FY16. Even without the extra expenditure involved in the Pay Commission and OROP, this restricts the nominal deficit available over FY17.
This also means that, unlike in the past, the economy is in a strong disinflationary mode, partly due to global circumstances and partly due to domestic demand being very poor. This suggests the need for an accommodative monetary and fiscal policy, though the space for the latter is restricted; also, the economy can slip back into trouble quite soon. The government has explained the big difference between the manufacturing GVA and IIP in FY16 by arguing that while corporate sales have been dampened by lower prices, profits have risen—analysis by JP Morgan show that while the CSO’s data implies a profit growth of 16.9% in Q3FY16, the earnings growth for a sample of 60 large, listed firms was under half that, after excluding the depressed metals sector. At a time when private consumption grew a mere 6% in the first nine months of FY16, it is difficult to see how earnings can be sustained in the future especially since input prices aren’t going to fall as sharply in FY17—as we have pointed out earlier, the FY16 estimates, which also form the basis of the higher Crisil numbers for FY17, are based on consumer demand rising by an unbelievable 12% in Q4. Gross fixed capital formation, despite the inexplicably higher GDP numbers, have been falling steadily, from 34.3% of GDP in FY12 to 31.6% in FY16—without investment picking up, it is difficult to argue the economy is in fine fettle. The problem with a faulty GDP gauge is that it can lull the authorities into thinking that emergency measures are not required—in 2009-10, with GDP underestimated, India over-stimulated the economy and that is what led to the stubborn inflation of the next few years. Let’s not repeat this mistake.