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LATEST NEWS UPDATES | Turning the corner -Ajit Ranade

Turning the corner -Ajit Ranade

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published Published on Dec 2, 2017   modified Modified on Dec 2, 2017
-The Hindu

The next few quarters call for focus on consumption, private investment, agriculture and exports

There was a collective sigh of relief when the second quarter GDP data were released officially by the Central Statistics Office (CSO). The government folks were relieved that a declining trend of four consecutive quarters of growth had finally been reversed.

The forecasters and economists were relieved that the announced data had mostly conformed to their expectations. Industry and business people were now hopeful that this was the first instance of a sustained upward trajectory of growth. GDP growth came at 6.3% for the quarter ending September, higher than 5.7% in the previous quarter, but still lower than 7.5% a year ago. The Finance Minister said that the effects of the demonetisation and initial rollout of the goods and services tax (GST) were behind us. (In saying so, he implicitly endorsed the view that indeed demonetisation and the GST rollout had been negative for the GDP, at least in the short run. But this is not the occasion for such minor nitpicking!)

Devil’s in the detail

All these responses of being assured that we had turned a corner are justified if we see some of the positive details from the GDP data. For instance, industrial growth accelerated from 1.6% during the June quarter to 5.8% in this September quarter. Its subcomponent, manufacturing, too grew faster at 7% compared to only 1.2% during the previous quarter. This data is a bit puzzling since it seems inconsistent with the data on the Index of Industrial Production (IIP), whose growth is only 2.2% during this quarter. The services component of trade, hotels, transport and communications also grew smartly at 10.5% for the half year, as compared to 8.3% a year ago. So much for the good news.

Industrial revival is an absolute must for sustained growth in employment and output. It should also be accompanied by an increase in private sector investment, which is still lacklustre. The portion of GDP growth coming from fixed capital formation (which stands for investment activity) declined from 27.5% in the first quarter to 26.4% now. This has to be closely watched, and needs high policy priority. All the improvements in the Ease of Doing Business (EODB) ranking are meaningless unless we see substantial pick-up in private sector investment. More about this later.

There was one more silver lining in the data. The CSO says that GST collections data are provisional, and could be an underestimate. To that extent an upward revision of the GDP data is possible in the future.

So if the GDP trend is satisfactory, why did the stock market react so negatively? It is of course hazardous to impute motives to the stock marker index movements, since there are multiple influences, both domestic and global. Several caveats are in order. The stock market has been scaling new peaks, even though GDP growth had been declining. The stock market is always a forward-looking entity, a harbinger of things to come. Whereas the GDP data released by the government describe what happened two or three months ago. The stock market is swayed by a relatively small minority of deep pocket investors (and increasingly algorithms and bots), so its reaction is not representative of what’s happening to the broad-based economy. Even so, despite these caveats, it’s useful to pay heed.

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The Hindu, 2 December, 2017, http://www.thehindu.com/opinion/lead/turning-the-corner-focus-on-growth-in-the-next-few-quarters/article21244427.ece?homepage=true


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