News of a 7.4 per cent increase in the second quarter (July-September) GDP growth rate has brought some relief for the Central government. Finance Minister Arun Jaitley expressed “satisfaction”, as the growth was better than the 7 per cent clocked in the first quarter of the current financial year. He also said the overall growth would be in the vicinity of 7.5 per cent for the full year. But there are several reasons why the government cannot afford to congratulate itself just yet. For starters, the fact that this 7.4 per cent growth corresponds to just 5.2 per cent growth in the old series of GDP growth used until the last financial year shows how anaemic the economic recovery really is. Moreover, the key driver of growth in the last quarter has been a revival in manufacturing, which grew by 9.3 per cent. It is indeed creditable, as Jaitley stated, that manufacturing recorded a “significant” increase despite muted global demand. But as the latest edition of Nikkei’s Manufacturing Purchasing Managers’ Index, released on Tuesday, showed, manufacturing growth for November (which falls in the third quarter) has fallen to a two-year low. Essentially, this suggests that the star performer in Q2 is likely to falter in Q3 and underscores the tenuous nature of India’s growth recovery, which stood at 6.9 per cent in the last year of UPA rule.
The RBI monetary policy review on Tuesday underlined the worsening global scenario. In the US, industrial production has slumped; Europe continues to struggle with unemployment; China is weighed down by overcapacity; while the other emerging economies face headwinds from largely structural constraints. The 11 straight months of decline in India’s exports is a reflection of this scenario. But perhaps the bigger challenge lies within the domestic economy, which is littered with mixed signals. While urban consumption shows some revival, rural demand — on the back of two consecutive drought years and poor construction activity — has weakened further. Poor implementation of the MGNREGA and confusion over the transfer of funds between the Centre and states, in line with the recommendations of the 14th Finance Commission, are some other possible contributors to subdued demand. Other lead indicators, too, are confusing.
For instance, while commercial vehicle sales have accelerated, railway freight traffic has slowed down.
Simply put, the economic recovery is far from convincing and a lot of government action is required to consolidate the positive signals in different sectors. It is imperative that the Centre co-ordinates with states to alleviate agrarian distress. Retail inflation, driven by food inflation, has been close to 5 per cent, despite wholesale inflation being in negative territory. The management of the food economy is crucial. Lastly, with banks and the private sector saddled with debt, it is incumbent on government investment, especially in infrastructure, to create a climate that encourages growth.