As India’s GDP Growth Recuperates, It’s Time to Get to Work

“It is crucial that we sustainably continue the upward trajectory from here,” writes Vaibhav Kapoor.

On 30 November, the Central Statistics Office released the Gross Domestic Product (GDP) estimate for the second quarter of the 2017-18.

At constant prices (2011-12), India’s GDP came in at Rs. 31.7 lakh crore as compared to Rs 29.8 lakh crore for Q2 (2016-17), registering a 6.3 percent growth year-on-year.

Furthermore, the overall Gross Value Added (GVA) at basic price at constant (2011-12) prices registered a growth of 6.1 percent over the same period last year. Zooming out of this quarter, when we look at GDP growth rates for the last few years, we see the following trend.

Tremors After Note Ban, GST Have Subsided

We see that the GDP growth rate has been on the decline since Q1 (2016-17). Various reasons have been attributed for this downward trend; we will not get into those here. Data for this quarter certainly shows a reversal of this trend of the last five quarters. So the question now is, have we turned a corner?

Let us look at what all has happened recently.

The tremors felt after “demonetisation” in November 2016 have subsided.

We also have some of the teething issues related to the Goods and Services Tax (GST) behind us. The benefits of GST were reflected in Nikkei India Manufacturing Purchasing Managers' Index on 1 December which rose to 52.6 in November compared to 50.3 in October, a 13-month high.

The press release quoted that “India’s manufacturing economy advanced on its path to recovery as disruptions from the recent tax reform (GST) continues to diminish”.

Furthermore, GST refunds to exporters are underway and the recently set up Anti-Profiteering authority has led to FMCG companies passing through tax changes through reduction in prices, benefitting the end consumer.

Leading Economic Indicators See Upward Trend

Positive policies like the 2.11 lakh crore bank recapitalisation package, infrastructure spending of Rs 8 lakh crore on highway works before end of 2018 under the Bharatmala Prayojana, granting infrastructure status to the logistics sector among others are expected to have a positive impact on the economy.

Recently, India has also received some international endorsements including the significant improvement in the World Bank’s Doing Business Index and a credit rating upgrade by Moody’s Investor Service. These will also boost investor sentiment, at least in the short to medium term.

Furthermore, leading economic indicators such as vehicle sales (8.1 percent growth in production and 7.7 percent growth in sales for the period between April and October 2017 versus the same period last year), air passenger traffic (17.3 percent growth in domestic traffic for the period between January and October 2017 versus the same period in 2016), index of industrial production (2.5 percent growth in April-September 2017 versus the same period in 2016) among others have also seen an upward trend over the last few months.

India Can’t Afford a Slowdown

This is all good news and it looks like we might have indeed broken a 15-month-long trend. But should we celebrate already?

We must recognise how crucial it is that we sustainably continue the upward trajectory from here. To give some perspective, for example, only if India’s GDP grows at 7 percent for the next 20-22 years will we be able to reach where China’s GDP is today. Put in some population growth estimates and we might still be worse off on a per capita basis.

India cannot afford a growth slowdown if we have to create good jobs that employ the millions of young Indians entering the workforce every year.

Furthermore, some external factors (only a couple are discussed here), which have a profound effect on GDP growth, might dampen domestic efforts from time to time. For instance, the oil price, which has been inching upwards over the last 12 months, directly impacts India’s energy bill.

With an OPEC meeting being held to discuss further production cuts, this pressure doesn’t seem to be abating anytime soon for India, which is a large importer of the commodity. Furthermore, increasing influence of technology might have a longer-term effect on the ability to create jobs for the section of our manufacturing sector which relies solely on wage arbitrage.

In the end, a lot depends on our domestic policies and activities. We must ensure that the reform process, which is underway in full force, does not slow down.

Some of the reforms might be unpopular in the short-term and beneficial only in the medium- to long-term.

However, this should not deter the process of change in a country where a large number of processes and procedures set up decades ago are far from perfect. A focus on key areas including ease of doing business, education, public health and improving governance at all levels of Government, will go a long way in sustaining the much needed high growth rates over the next few decades.

(Vaibhav Kapoor is a Public Policy Specialist at NITI Aayog. He is a Masters in Financial Economics from University of Oxford and has worked across the investment banking and advertising technology industries in London. Any views expressed are personal.)