Cause for caution

Cause for caution

News:

1. India’s GDP growth rate stands at 8.2% for the first quarter (April-June) of this year.

Important facts:

2. The growth rate estimates need to be interpreted in the backdrop of:

• Depreciating rupee.
• Rising NPAs.
• Widening trade deficit.
• Shooting fuel prices.

3. Despite all these concerning economic trends, the GDP rate presents a robust picture.
4. Partly, it can be explained by low base effect i.e. low growth rate in the previous year gives inflated effect on the growth rate of the present year
5. Deeper understanding of this growth paradox require sector wise analysis:

• Agriculture: agricultural GDP growth quickened as two successive years of good rains improved farm produce, but remained low.
• Manufacturing and construction: both the industries are gaining revival after the shock of demonetisation and simplification of GST.
• Services: the growth rate of this sector slowed down, still grew faster than agricultural GDP.
• Rural wage growth has remained stagnant for the past four years.
• Consumer Industries: they are reporting robust sales growth.
• Powered by government salary and pension hikes, private consumption growth has quickened.
• The share of investments in the GDP has reduced – a direct consequence of NPA crisis.
• Banking: only a little progress made in recapitalisation and in reforming Public sector Banks.

6. Challenge before the government:

• The consumption driven growth is not sustainable after a point, especially if it is financed by government deficit.
• Mounting macro-economic pressures such as rising crude prices, risk of rising inter-country trade war etc.

7. Suggestive measures and growth dilemma before the government:

• Currency devaluation to arrest the trade deficit, but it will also inflate retail fuel prices.
• Tax cuts on fuel to restrict fuel price hikes will widen fiscal deficit.
• RBI can increase interest rates to stabilise rupee, but it will increase the cost of borrowing and affect the investments.

8. Way forward

• Removing bottlenecks and bringing efficiency in the supply chains.
• Reducing the dependence on fossils and accelerating transition to renewable source of energy.
• Inclusion of modern technologies in the manufacturing to boost Make in India, and shorten trade deficit