The critical phase is the third and four quarters. Here, there is reason to be a little more sanguine. The monsoon has finally not turned out to be as bad as was expected and the overall kharif numbers may not be too unsatisfactory”
The latest GDP growth numbers – to the extent that they do not change soon – are mildly encouraging but are not strong enough to make us ecstatic. They are encouraging because after four successive declining quarterly growth rates, this mild increase comes as a breath of fresh air. The GDP internals reveal that growth is not really broad-based and that some of the sectors like construction or agriculture that did well this time may not repeat the performance over the next few quarters. The issue is whether or not growth has bottomed out and what this holds for the rest of the year.
There is reason to believe that growth will be in the upward direction from now onwards, though the sectoral contribution will vary. The second quarter is typically a phase in which nothing really significant occurs. There is only residual farm production that comes in since the kharif and rabi are third and fourth quarter phenomena. It is more horticulture, animal husbandry and so on that add to the numbers. Manufacturing chugs along. Construction activity slows once the monsoon sets in. The only major driving force is services, especially in the government sector that by virtue of a high fiscal deficit can provide a boost to the extent that it creates demand and does not just buffer costs as in the case of fuel subsidy. This is also the time when the National Rural Employment Guarantee Scheme is active.
The critical phase is the third and four quarters. Here, there is reason to be a little more sanguine. The monsoon has finally not turned out to be as bad as was expected and the overall kharif numbers may not be too unsatisfactory. Add to this the fact that the late monsoon helps rabi sowing, and we could see some steady farm sector performance. Manufacturing would benefit more from the presence of the base effect in these two quarters in which growth was low last year. This, combined with a pick-up in consumer spending will help a bit. But overall growth may not go beyond the three-per cent mark by the end of the year. Construction would revive once the government expedites projects in the infrastructure space.
The service sector will continue to be the mainstay and though the performance in Q1 was tardy with the trade and transport sector crawling, other components such as finance and administration have done better. With agriculture and manufacturing reviving, there will be a positive impetus to trade and transport that is based on production activity.
Can something upset this story? The absence of a policy thrust is an issue for overall growth, and may not come too soon. But these conditions were anyway not present to begin with and our growth was based on other factors. The absence of government spending is a possibility, given it cuts back on project expenditure to rein in the deficit. This can push us back considering that private investment is not forthcoming.
On the positive side, the Reserve Bank of India (RBI) could lower rates in the third and fourth quarters mainly owing to growth concerns as in April, though inflation will continue to be high in the food segment. No action from RBI can be a factor disrupting this story.
Therefore, there is reason to believe that growth will climb upwards, albeit very gradually, and will be around six per cent for the year. The fact that everything that can go wrong has already been buffered is in a way positive. Can there be a hard slippage in any of these quarters? This cannot be ruled out in the second quarter but considering that most of the productive activity comes in the third and fourth quarters, it should not be interpreted as a fallback unless things go horribly wrong and growth slips below the psychological five-per cent mark.
Though the bottoming-out theory will most probably hold, it does not mean we can gallop along at this rate without affirmative action on the policy front for too long. We can be lucky once more this year, with a lot of aid of the base effect, but we should not push our luck since moving to a higher growth trajectory cannot be achieved with status quo in the topography. There lies the rub.
The latest GDP growth numbers – to the extent that they do not change soon – are mildly encouraging but are not strong enough to make us ecstatic. They are encouraging because after four successive declining quarterly growth rates, this mild increase comes as a breath of fresh air. The GDP internals reveal that growth is not really broad-based and that some of the sectors like construction or agriculture that did well this time may not repeat the performance over the next few quarters. The issue is whether or not growth has bottomed out and what this holds for the rest of the year.
There is reason to believe that growth will be in the upward direction from now onwards, though the sectoral contribution will vary. The second quarter is typically a phase in which nothing really significant occurs. There is only residual farm production that comes in since the kharif and rabi are third and fourth quarter phenomena. It is more horticulture, animal husbandry and so on that add to the numbers. Manufacturing chugs along. Construction activity slows once the monsoon sets in. The only major driving force is services, especially in the government sector that by virtue of a high fiscal deficit can provide a boost to the extent that it creates demand and does not just buffer costs as in the case of fuel subsidy. This is also the time when the National Rural Employment Guarantee Scheme is active.
The critical phase is the third and four quarters. Here, there is reason to be a little more sanguine. The monsoon has finally not turned out to be as bad as was expected and the overall kharif numbers may not be too unsatisfactory. Add to this the fact that the late monsoon helps rabi sowing, and we could see some steady farm sector performance. Manufacturing would benefit more from the presence of the base effect in these two quarters in which growth was low last year. This, combined with a pick-up in consumer spending will help a bit. But overall growth may not go beyond the three-per cent mark by the end of the year. Construction would revive once the government expedites projects in the infrastructure space.
The service sector will continue to be the mainstay and though the performance in Q1 was tardy with the trade and transport sector crawling, other components such as finance and administration have done better. With agriculture and manufacturing reviving, there will be a positive impetus to trade and transport that is based on production activity.
Can something upset this story? The absence of a policy thrust is an issue for overall growth, and may not come too soon. But these conditions were anyway not present to begin with and our growth was based on other factors. The absence of government spending is a possibility, given it cuts back on project expenditure to rein in the deficit. This can push us back considering that private investment is not forthcoming.
On the positive side, the Reserve Bank of India (RBI) could lower rates in the third and fourth quarters mainly owing to growth concerns as in April, though inflation will continue to be high in the food segment. No action from RBI can be a factor disrupting this story.
Therefore, there is reason to believe that growth will climb upwards, albeit very gradually, and will be around six per cent for the year. The fact that everything that can go wrong has already been buffered is in a way positive. Can there be a hard slippage in any of these quarters? This cannot be ruled out in the second quarter but considering that most of the productive activity comes in the third and fourth quarters, it should not be interpreted as a fallback unless things go horribly wrong and growth slips below the psychological five-per cent mark.
Though the bottoming-out theory will most probably hold, it does not mean we can gallop along at this rate without affirmative action on the policy front for too long. We can be lucky once more this year, with a lot of aid of the base effect, but we should not push our luck since moving to a higher growth trajectory cannot be achieved with status quo in the topography. There lies the rub.
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