TNS MINT ANALYSIS

Is the worst over for the Indian economy?

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NEW DELHI: India’s economic growth accelerated in the fiscal year ended 31 March, with signs pointing to a manufacturing and investment recovery that’s expected to accelerate this year, according to data released on Friday.

According to the provisional estimates released by the Central Statistics Office (CSO), the gross domestic product (GDP) in 2014-15 grew 7.3%, a tad lower than the advance estimate of 7.4% released in February.

In fact, the fourth quarter (January-March) numbers showed the economy gathering pace, growing 7.5% compared with 6.6% in the third quarter (October-December).

The data will bring cheer to Prime Minister Narendra Modi’s National Democratic Alliance (NDA) government, but some experts remain skeptical about the credibility of the numbers after the statistics department changed the way it measures GDP.


Even chief economic advisor in the finance ministry Arvind Subramanian called the new series of GDP data “puzzling” earlier this week. Most experts are of the opinion that the data creates a rosy picture of the economy that’s not validated by other macro indicators.

One point of concern is agriculture, which was hit by a deficient monsoon last year and unseasonal rainfall that damaged standing crops this year. During the fiscal year, agricultural growth almost vanished; it slowed to 0.2% from 3.7% a year ago

During the fourth quarter, manufacturing showed a significant pick-up to 8.4% from 3.6% in the third quarter. Growth in trade, hotels and transport almost doubled in the fourth quarter to 14.1% from 7.4% in the previous quarter, while growth in public services—representative of government expenditure—almost disappeared (a growth rate of 0.1%) due to the drastic cut in expenditure by the government to meet its fiscal deficit targets. It stood at 19.7% in the third quarter.

Gross fixed capital formation, a proxy for investment demand in the economy, accelerated in 2014-15 (4.6%) compared with the previous year (3%), with fourth quarter data further confirming it, showing 4.1% growth compared with 2.4% in the third quarter. Private consumption demand, represented by private final consumption expenditure, also showed a recovery, growing at 7.9% in the fourth quarter compared with 4.2% in the previous quarter, though during the full year it remained almost flat at 6.3%.

Flat or weak demand conditions are expected to force the Reserve Bank of India (RBI) to reduce its policy rates by 25 basis points in its monetary policy review on Tuesday as retail inflation continues to soften, falling well within the central bank’s comfort level. Retail inflation eased to a four-month low of 4.87% in April.

Ratings firm Crisil Ltd’s chief economist D.K. Joshi said though a moderate recovery was under way, ground-level data showed weak consumption and investment demand in the economy. “Weak growth and weak inflation may allow RBI to cut interest rates,” he said.

The finance ministry, in a statement, said the pickup in manufacturing is “one very encouraging news.” “One broad way of looking at the latest estimates is that those sectors within control of policy such as manufacturing and services improved substantially while those dependent on factors beyond policy control, such as agriculture (dependent on weather) and exports (dependent on foreign demand) did less well,” the statement read.

CSO said the provisional GDP estimates incorporate the latest estimates of agricultural production, factory output and performance of key sectors like railways, transport other than railways, communication, banking, insurance and government expenditure.

“Early results on the performance of the corporate sector for April-December 2014, which were used in the advance estimates, have been revised on the basis of latest available information. The information on corporate performance as available from company finance studies of RBI has been supplemented with the information available from advance filings with Bombay Stock Exchange and National Stock Exchange,” it added.

The CSO has changed the methodology for measuring the economy’s growth—it changed the base year for calculations to 2011-12, among other things. That has raised doubts among economists about the credibility of the data.

Madan Sabnavis, chief economist at CARE Ratings, another ratings firm, said any recovery in the economy from here onwards has to be led largely by the services sector.

“Chances of a revival in agriculture appear weak. The government too would be constrained in spending more to propel growth, given the fiscal constraints, and will be restricted to what has been budgeted. We expect GDP growth to be in the range of 7.8-8% in 2015-16,” he added.

With global demand staying weak, India’s merchandise exports contracted for the fifth month in a row in April and there is little hope of a sharp rebound anytime soon.

The US economy, one of India’s key markets, contracted in the January-March quarter as it buckled under the weight of unusually heavy snowfall and a resurgent dollar. The US government on Friday slashed its GDP estimate to show it shrinking at a 0.7% annual rate instead of the 0.2% growth pace it estimated last month.

Yes Bank Ltd, in a report released on Thursday, said: “We continue to place India’s growth cycle at an inflection point, with confluence of three factors expected to support growth here on—lagged impact of strong policy push, lower commodity prices and an easing interest rate cycle.”

In a report titled “Modified Expectations,” Crisil earlier this month said lack of demand was the real hurdle to economic revival and there was little that the government could do to engineer a quick uptick. “The government has not been able to effect a quick turnaround in the economy, but has made progress in terms of putting in place the building blocks needed to raise India’s potential growth,” it said.

The immediate challenge to the government could come from the weather. The India Meteorological Department has predicted a 7% rainfall deficiency in 2015. Going by international weather forecasters, El Niño conditions—which typically distort the spatial distribution of the monsoon—have also emerged. A bad monsoon will not only impact growth and rural demand, it will also drive up food inflation, reducing the central bank’s ability to further cut policy rates.

© 2015 THE MINT (NEW DELHI) / DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC.    

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