What the latest economic data mean: Modi govt is running out of time to fix the economy
There is a clear message for the government from two of the three sets of economic data released today – there is just no room for complacency on the economy front. Consumer demand and investment both need to be revived – ASAP.
There’s no denying that the Narendra Modi government has taken a number of much-needed steps to put the economy back on track in its one year of office, but that is just not translating into good numbers.
Take a look at the economic growth figures for the first quarter (Q1) of 2015-16, that come a year after the Modi government took charge. Sure, a 7.1 per cent growth isn’t something to be scoffed at, but it isn’t anything to party about either. And it’s lower than the 7.4 per cent growth logged in Q1 of 2014-15 when the government had been in office for just a month.
Barring construction and the trade, hotel, transport, communication category of services, all sectors have performed poorly against Q1 last year. The decline in agriculture is perhaps expected, thanks to vagaries of rainfall, but this is the first quarter of positive growth after two quarters of decline (Q3 and Q4 of 2014-15).
Interestingly, agriculture did better through 2013-14 (there was an increase every quarter) and has been in decline, quarter on quarter, through 2014-15.
Look also at the figures on the core sector – the eight infrastructure industries. Growth in April-July is a mere 2.1 per cent against 5.5 per cent in April-July last year. Growth was actually near-stagnant in July; the 1.1 per cent growth that the month saw was a steady decline from 4.4 per cent in May and 3 per cent in June.
Fortunately, the third set of data – on public finances for the first four months of 2015-16 – showed that the government is on the right track in one respect.
On the face of it, the fact that the government has already run up a fiscal deficit that is close to 70 per cent of the budget target is worrying (it was 61 per cent in April-July last year). Total expenditure is 33.8 per cent of the budget target against 28.1 per cent last year.
However, the quality of spending is certainly improving. The share of capital expenditure in total expenditure is increasing – from 12 per cent April-July 2014 to 14 per cent in April-July 2015. This is a healthy sign, indicating a clear focus on public expenditure on infrastructure and this augurs well for the economy.
This might just give a boost to the core sector, especially the steel and cement industries, both of which were stagnant at 1.4 per cent and 1 per cent growth respectively in April-July against 5.9 per cent and 11.2 per cent in the same period last year.
Another indicator of an improved deficit quality is the share of the revenue deficit in the fiscal deficit – an indication of how productive the spending is. The share was 81.9 per cent in April-July 2014; it is down to 79.4 per cent in April-July 2015. Clearly, the government is trying to clamp down on spending on subsidies and other items of revenue expenditure that can be cut, though better tax collections also play a part, led by a 79 per cent surge in excise collections.
The clamp down on revenue expenditure is indicated by another figure in the gross domestic product (GDP) data. Government final consumption expenditure as a percentage of GDP is down to 11.9 per cent in Q1 of this fiscal against 12.4 per cent in Q1 of 2014-15. This is certainly a good sign.
What does the government need to look out for?
Serious attention needs to be given to agriculture – rain-proofing it, helping increase productivity and profitability. Instead of knee-jerk reactions to suicides by farmers by changing names of ministries, the government needs to get down to implementing the laundry list of agriculture reforms, many steps on which there is consensus on the part of those on opposite sides of the ideological spectrum.
There’s a clear need to get the investments going again. Gross fixed capital formation (GFCF) as a percentage of GDP (an indicator of investment activity) declined from 29.2 per cent in Q1 last year to 27.8 per cent in Q1 this year. This is the lowest in the last nine quarters and worrisome. GFCF has been declining steadily since Q2 of 2013-14 when it touched 30.5 per cent. Getting the investment cycle back on track will pull up some of the core sector industries as well.
Fortunately, consumer demand seems to be reviving, albeit slowly. At 61.3 per cent of GDP, private consumption expenditure was better than in Q1 of last year when it was 60.7 per cent of GDP. This ratio has been fluctuating quarter on quarter since 2013-14 and clearly needs to be nurtured.
This is important because consumer demand is what will revive the manufacturing sector.
The 7.2 per cent growth in manufacturing in Q1 this year is good, but is lower than the 8.4 per cent logged in Q1 last year. The index of industrial production (IIP) for Q1 also showed lower growth this year (though that measures actual production from the organised sector and GDP figures cover a larger spectrum).
Putting the zing back in manufacturing will be important to generate jobs – the single biggest challenge before the government today and the only way that Modi can once again win the goodwill that brought him to power and which he appears to be in danger of losing.
Reviving manufacturing will mean getting aggressive on economic policy and reforms – GST has to be rammed through, public sector infrastructure investments have to be fast-tracked and private sector ones facilitated on priority basis.
All these steps, whether they relate to agriculture or industry, need to be taken immediately. They will take time to bear results. Time is a luxury this government does not have.