Economic growth much weaker than what headline numbers show

Source:, Jan 10, 2017

What is the picture of the Indian economy that emerges from the Central Statistics Office’s (CSO) advance estimates of gross domestic product (GDP) for 2016-17? These estimates incorporate data up to October 2016 and therefore do not take into account the negative impact of demonetisation on the economy. Nevertheless, they do reveal some significant facts.

The first and most important one is the huge stimulus given to growth by government consumption. Growth in the economy in the current fiscal year has been propped up by government consumption, as the government implemented the Seventh Pay Commission recommendations and the One Rank One Pension rule. Indeed, growth in government final consumption expenditure (GFCE), if the CSO’s estimates are correct, will account for 33% of the growth in GDP at constant prices in the current fiscal year. That is a very high proportion—in 2015-16, for instance, the contribution of government consumption to GDP growth was a mere 3.1%. Private sector consumption is estimated to contribute slightly more than half of the total growth in GDP, while government consumption contributes another third. Clearly, the economy continues to rely on only one engine of growth—consumption.


Indeed, if we leave out government consumption from the GDP figures, growth in the rest of the economy comes down dramatically. Chart 2 shows that growth in the rest of the economy (apart from government consumption) in 2016-17, at constant prices, is expected to be a mere 5.2%, the lowest in the last five years. Even in 2013-14, when the taper tantrum hit the country, this part of the economy was growing more rapidly. Given that the vast majority of people work in the private sector, it’s not a pretty picture.

What about investment demand? Growth in gross fixed capital formation, at constant prices, is expected to be a negative 0.2% in 2016-17, according to CSO. This is the first time in five years that capital formation will be negative. Even during the last years of the United Progressive Alliance government, when criticism of the government’s handling of the economy was strident, we didn’t see fixed capital formation growth turn negative. Growth in the economy will come back strongly only when fixed capital investment picks up.

Note that growth in the construction sector, which is the main source of employment for the masses, is expected to be a mere 2.9% this year, a four-year low. That doesn’t bode well for employment growth. The solace is that agriculture is expected to do well this year, so perhaps there’s a cushion for the rural poor provided, of course, we assume the impact of demonetisation on the farming sector will be limited. The chart also shows considerable deceleration in the “trade, hotels, transport, etc.” sector, which is another big source of employment for the masses. Growth in this sector is at a five-year low. But growth in manufacturing, although lower than last year, hasn’t been too bad.

The headline numbers show that, even if we leave demonetisation out of the reckoning, the CSO believes economic growth this fiscal year will be the lowest in three years. GDP growth for 2016-17 at constant prices is estimated at 7.1%, compared to 7.6% last year and 7.2% in 2014-15. After factoring in the effects of demonetisation, growth would be even lower this year, very likely lower than 7%. But as we have seen, the headline growth number hides more than it reveals.


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