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India may boast best GDP figures, but all's not well with the economy

Rajeev Dubey     June 1, 2018

There's much to cheer about the 7.7 per cent GDP growth rate in Q4 of 2017-18. The economy is surely and steadily accelerating - from 5.6 per cent in Q1 to 6.3 in Q2 to 7 per cent and now 7.7 per cent. It finally lays to rest the repetitive argument: "If GDP was calculated by the previous methodology..."  because this growth and acceleration is good even by the old methodology.

Yet, there's still a lot that's not right with the economy. First, despite this smart recovery in Q4, the GDP for the entire fiscal was barely 6.7 per cent - 0.4 per cent lower than the previous financial year. The Economic Survey had projected a GDP growth rate of 6.75 per cent. The final GDP growth numbers for fiscal 2017-18 were higher than the government's own first and second advance estimates of 6.5 per cent and 6.6 per cent but they mirror the estimates of the World Bank and the IMF.

Also, since the Gross Value Added (GVA) for fiscal 17-18 grew just 6.5 per cent - a pace even lower than the GDP growth - this indicates that much of the growth in the GDP has been achieved through higher taxation and not necessarily substantially higher economic activity. For the un-enunciated, GDP equals GVA + taxes - subsidies. Gross Value Added is the total value of goods and services produced in the economy. Clearly economic activity, expansion and growth still lag the GDP growth. Technically it's possible to continue growing GDP by just raising taxes, even though consumption may not be growing or economy may not be expanding. Though that's not the case here as the GVA also grew 6.5 per cent but surely taxes made a greater contribution to the GDP last fiscal.

Next, despite this scorching rate of growth, several sectors experienced deceleration. Agri growth was 3 per cent lower than the previous year; mining growth 10 per cent lower; and manufacturing 2.2 per cent lower. Utilities also grew at a rate 2 per cent lower. In manufacturing specifically, there's some pick-up in private corporate sector growth (which accounts for 70 per cent of manufacturing). However, the sector was dragged down by proprietorships/partnerships and Khadi & Village industries, which grew barely 4.5 per cent in 2017-18.

One of the biggest indicators of a growing economy and higher industrial activity is the utilities consumption. However, electricity, water, gas other utilities was just 7.2 per cent against previous fiscal's 9.2 per cent. Electricity itself grew just 5.4 per cent. Lower growth is a combination of lower consumption due to more efficient use of energy as well as lower than expected industrial activity.

The sectors that experienced higher economic activity in 17-18 against the previous year are: Trade, hotels, transport, communication and broadcasting services, which grew at a rate 0.8 per cent higher; Financial, real estate and professional services also perked up and grew 6.6 per cent against 6 per cent last fiscal.

As for the current fiscal, global rating agency Fitch says India will grow at 7.3 per cent in 2018-19 and 7.5 per cent in 2019-20.  The economy will struggle with the triple whammy of higher crude oil prices, higher interest rates, and still rising non-performing assets in the banking system. Overcoming these would be vital to the economic progress of India and Indians. So cheers can wait just a big longer.

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