The 5.7 per cent growth in GDP in the first quarter, April to June of this fiscal, is the slowest since the NDA government came to office and well below most estimates. Growth in manufacturing slumped to 1.2 per cent in the quarter to June — a five-year low compared to the earlier quarter — which according to India’s chief statistician owed to a high level of inventory de-stocking, while mining contracted by 0.7 per cent. Agriculture growth, too, was weak. The construction sector grew by 2 per cent after a negative March quarter; the hotel, transport and communication segment grew 11.1 per cent on higher sales perhaps because of discounts in the run-up to the roll-out of GST. What helped boost growth was spending by government which accounted for one-third of GDP growth in this quarter and reflected in the government’s fiscal deficit in the April to July period which is now over 92 per cent of the Rs 5.46 lakh crore estimated for FY 18.
Earlier, the Economic Survey had said that several deflationary impulses were weighing on the economy and that growth was likely to miss the upper band of the GDP forecast of 6.75 per cent to 7.5 per cent for FY 18. Finance Minister Arun Jaitley has said the growth numbers were a matter of concern, and emphasised the need to work more on policy and investment in the next few quarters. The current slowdown may have started in mid-2016 with demonetisation accentuating it, with demand being squeezed. But there is concern over whether the supply shocks or disruption caused by demonetisation and transition to GST are more permanent, less transitory. It also comes at a time of farm distress in large swatches of the country, lower demand and capacity utilisation, weaker external demand and when firms are deleveraging — a process which can stretch long and prove extremely painful for the economy.
The government has sought to draw comfort from the fact that gross fixed capital formation or GFCF, a measure of investment, rose 1.6 per cent year-on-year which is seen as a moderate improvement. The GFCF has been on the decline over the last few years — sliding to 26.9 per cent of the GDP in FY 17 compared to 29.2 per cent in the earlier fiscal. It is now clear that the twin balance sheet problem — of stretched firms and banks burdened by bad loans — is weighing down the economy. A cleaning up, as the global experience shows, can be prolonged and painful, involving loss of jobs and output. The government will be tested when it comes to reviving demand and investment.
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