The advance estimates of national income, released by the Central Statistics Office (CSO) on Monday, have flummoxed many — for good reason. Firstly, the third quarter (October to December) real (after adjusting for inflation) GDP growth rate has been pegged at 7.3 per cent, which was above market expectations. Data suggests this growth has been driven by manufacturing and services. However, most of the leading indicators, such as credit growth or capital expenditure, signal a very slow economic recovery. Secondly, there was another positive surprise as the (real) GDP growth rates for quarters one and two were bumped from 7 to 7.6 per cent for Q1 and 7.4 to 7.7 per cent for Q2. As a result, the overall GDP growth rate for the current financial has been pegged at 7.6 per cent, better than the 7.2 per cent for the last financial year (2014-15). Incidentally, the FY15 figures were revised down on January 29. Of course, the revisions are a valid outcome of the new methodology, yet the extent and frequency of revisions as well as the lack of clear understanding of the new methodology have made the task of drawing meaningful conclusions more difficult than usual. The new data may well lead to a monetary and fiscal policy showdown.
To be sure, not all pieces of data were positive. The nominal (inclusive of inflation rate) GDP growth rate for FY16 is pegged at a 13-year low of 8.6 per cent. This has at least two implications. One, the government is likely to miss its fiscal deficit target (3.9 per cent of the GDP). Reduced nominal GDP growth would mean a 4.1 per cent deficit. Two, while the government looks at the falling nominal growth (due to negative wholesale inflation) to argue for an expansionary fiscal policy, which, in turn, will lead to still higher fiscal deficits and inflation, the RBI will pull in the opposite direction on the monetary policy front (towards raising interest rates) because it looks at retail
inflation (around 5.6 per cent). Needless to say, this imminent policy mismatch would have to be resolved.
On the face of it, India has done well to weather back-to-back droughts as well as the crash in exports without losing its way. Even by the old GDP methodology, economic growth in Q3 was 5 per cent. The future will depend on policy action by the government as well as a normal monsoon. That sounds familiar, even if not very promising.