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GDP at 7.6%? Not surprised, say economists

By Prasanna D Zore
June 07, 2016 15:47 IST
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‘As of now there are no major concerns for the Indian economy and we expect the economy should look up gradually. Everything seems to be under control.’

There were no ‘big bang’ reforms like the passage of two crucial laws, the Goods and Services Tax Bill and the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, and yet the Indian economy clocked 7.6 per cent GDP growth for the financial year 2015-16, surprising critics but also allowing the government to call it the “fastest growing major economy” in the world. spoke to three economists, of whom two said they were not at all surprised by the 7.6 pc growth in India’s gross domestic product for the financial year ending March 31, 2016.
While Axis Bank’s chief economist Saugata Bhattacharya said he was expecting an 8.2 pc GDP growth, Madan Sabnavis, chief economist at ICRA Ratings said there was no point in calling the numbers released by Central Statistical Organisation a ‘statistical illusion’, referring to the new method of GDP calculation adopted in January 2015 by the CSO, “because this is a certain methodology which we have adopted (and) which is globally aligned and that is what we will have to follow.”
Debopam Chaudhuri, Zyfin Research’s chief economist, however, expressed surprise at the 7.9 pc GDP growth registered in the last quarter of financial year 2015-16, citing no real pick-up in consumer and business optimism as indicated by private final consumption expenditure (PFCE) – which is the expenditure incurred on final consumption of goods and services by resident households and non-profit institutions serving households (NPISH) -- and Purchasing Managers’ Index  or PMI,  an indicator of the health of India’s manufacturing sector.
According to Chaudhuri, whose company tracks consumer sentiment, he was expecting the last quarter GDP to tick at 7.3-7.4 pc (against the actual 7.9 pc).
“But the PFCE is the biggest surprise because as far as the consumer sentiment goes, I haven’t seen any real pick-up which can boil down to more consumer spending,” Chaudhuri says.
“The month-on-month trend in consumer sentiment index starting from October 2015 till date is a very flat number in the range of 40-45, indicating consumer pessimism,” he adds.
Anything above 50 indicates a bullish consumer sentiment.
Interestingly, a report authored by Manasi Swamy of the Centre for Monitoring the Indian Economy states that the GDP growth during January-March 2016 was driven by an 8.3 per cent increase in private final consumption expenditure (PFCE). Government final consumption expenditure (GFCE) grew by a meagre 2.9 pc, while gross fixed capital formation (GFCF) declined by 1.9 pc as compared to the same quarter a year ago.
It is the GFCF number, Sabnavis says, that is slightly out of place and cause for concern but believes that the government is doing a good job and overall the economy is under control. “The government has only provided an enabling environment, but looking at the GCFC number one can say that investment is not taking place. As of now there are no major concerns for the Indian economy and we expect the economy should look up gradually. Everything seems to be under control.”
As per the CSO data, the GFCF number, considered by many as a barometer for investment, is at Rs 39.72 lakh crore ($594.78 billion) for 2015-16 at current prices, as against Rs 38.44 lakh crore ($575.62 billion) in 2014-15. This is an increase of 3.32 per cent in GFCF at current prices for 2015-16 over the previous fiscal.
Adds Chaudhuri: “If you look at constant price data, then GFCF does not show an increase at all.” In fact, he considers the GFCF as one of the major barometers to show the productivity of the national economy as a whole and “unless we see a major increase in GFCF (at current prices), it will be very difficult to say that we are on the cusp of a major recovery.”
Even though RBI governor Raghuram Rajan, citing “uncertain inflation”, kept the repo rate, a key policy tool that signals the direction of interest rate in the economy, unchanged at 6.5 per cent on Tuesday, Chaudhuri had expected a rate cut to further strengthen the green shoots of credit offtake that were visible on the horizon.
“If you look at the credit offtake, it has been showing some decent recovery in the last few months. However, interest rates need to be further decreased for a more healthy credit distribution. We are all looking forward to the RBI governor to reduce interest rates to give a further boost to credit offtake numbers. But the overall progress of monsoons will remain one of the key factors for any rate cuts from Dr Rajan in the next few quarters,” Chaudhuri had said before the RBI’s policy announcement.
“I think the green shoots, of which credit offtake is one, are beginning to look up and we are all waiting for a rate cut for this green shoot to take off. I think the RBI should give some leeway in inflation targeting,” he said.
Just like Chaudhuri, Sabnavis and Bhattacharya are also betting on a rate cut going ahead, provided the monsoon doesn’t play truant this year. “I expect a rate cut going ahead if the monsoons are normal and that will further stimulate the Indian economy,” says Bhattacharya.
Sabnavis, while expressing caution at the slow offtake in credit as well as falling export numbers, said, “I think slow credit offtake and falling exports shall continue until the second half but I don’t think the RBI will cut interest rates going ahead. It could happen at the end of this calendar year, once we get the clear picture of the monsoon (and its impact on agricultural growth).”
“I think we have been talking about these green shoots too often for the last two years but I think we are just going along a stable path and seeing certain sectors showing positive signs,” he added.

Image: File photograph of a wholesale market in Kolkata. Photograph: Rupak De Chowdhuri/Reuters.

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Prasanna D Zore / in Mumbai

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