Jump in investments in GDP data hard to believe PDF Print E-mail
Thursday, 01 March 2018 05:38
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Shobhana edit

That apart, the bad news is the slowdown in exports and consumption, the slowest increase in seven quarters

The biggest surprise in the GDP data for Q3FY18 is the sharp 12% y-o-y increase in Gross Fixed Capital Formation (GFCF) to Rs 10.51 lakh crore. Coming as it does on a base growth in Q3FY17 of 8.7% (earlier estimated at 1.7%), the number is truly impressive. However, given how the data on project-starts and those stalled collated by CMIE gives no indication whatsoever of any buoyancy in capex and neither are companies adding capacity at any meaningful pace, the number is puzzling. While the government is no doubt investing in infrastructure as are some other PSUs, the big jump in capital formation is inexplicable. For perspective, the average growth in GFCF between Q3FY16 and Q3FY17 was 10.3%, after which, it dropped dramatically to near-zero levels. A 12%-growth in Q3FY18, therefore, is a big rebound, of which there is little evidence on the ground if commitments by companies are to be considered. The other big surprise in the GDP numbers is the 4% growth in agriculture, not forecast by a single economist. Indeed, since horticulture didn’t fare too well in Q3FY18, it would appear the record crop output has more than compensated for it. However, despite this, there is a fair bit of farm distress since farmers have not been getting a good price for their output.

Given Q3FY17 was the demonetisation quarter, growth was expected to bounce back in Q3FY18. However, the economy seems to have done a lot more, going by the real GDP growth of 7.2% y-o-y. To be sure, the data doesn’t incorporate the performance of the informal sector which is believed to have been badly hit post-demonetisation and the rollout of the GST. Nonetheless, the pick-up in construction activity—up 6.8% y-o-y, albeit on a weak base of 2.8% y-o-y—is encouraging. The bad news is the slowdown in private final consumption expenditure (PFCE) which rose at 5.6% y-o-y, the first sub-6% growth since Q2FY16 when it grew at 4.2%. However, there is an unfavourable base effect because private consumption grew 9.3% in Q3FY17 after consumers made big purchases—to be able to use cash—after the demonetisation announcement. At the same time, one cannot ignore the fact that this the slowest increase in seven quarters. What should really worry the government though is the advance estimates for FY18 project exports growing at just 4.4%, on the back of a 5% growth in the previous year.

This is particularly unfortunate since global growth and trade have seen momentum over the past year. Moreover, the services sector is faring just about satisfactorily. For instance, public administration, defence and other services grew at 7.2% on a low base of 2.8% while the growth in the trade, transport and hotels segment slowed to 9% in Q3FY18 from 9.3% in Q2FY18. There was nothing to cheer about in the financial services segment either. In sum, the economy is on the mend, but it is too soon to declare growth sustaining at 7% or higher levels. The sharp revisions to the data make it hard to interpret any trends especially at a time when there are structural and other changes taking place in the economy. While the variance between the growth in the GVA, which grew at 6.7% y-o-y and the GDP which grew at 7.2% y-o-y is somewhat high, it could be an aberration on account of GST.


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