India's manufacturing growth decelerates to 2.7%, consumption-led GDP at 6.3% "unsustainable": Economists

By Jag Jivan*
Even as the Government of India continues to bask in glory over Gross Domestic Product (GDP) rising from 5.7% to 6.3% in the second quarter of 2017-18, two senior economists have come up with data to suggest that there was deceleration in key sectors like agriculture, manufacturing and construction, and, "more importantly, in investment".
Without questioning the methodology of the Government of India, which is under fire for creating a hype around GDP growth, the economists RK Pattnaik and Jagdish Rattanani, who are with the the SP Jain Institute of Management and Research, have said, it was largely a "consumption-led growth."
Not only agriculture should be an area of concern, for it has "shown a significant slowdown at 1.7%, against 4.1% in Q2 of 2016-17", even manufacturing has recorded "deceleration along with construction, where growth has been at 2.6%, down from the 4.3% witnessed in Q2 of 2016-17", the economists say in their analysis "Behind GDP data, some signs of concern".
Insisting that "these developments raise some questions on the soundness and sustainability of the growth trajectory", the economists say, "The stressed balance sheets of banks and corporations continue to act as a drag on investment activity", adding, a comparison of the relevant quarters (Q2 2016-17 with Q2 2017-18) shows that Gross Value Added (GVA) went down from 6.8% to 6.1% and GDP growth down from 7.5% to 6.3%."
Say the economists, "a critical look at the data shows that on the supply side" the sectors where growth is supported is mining, "which recorded a 5.5% growth as compared with 1.3% in Q2 of 2016-17", and "trade, hotel transport and communications... along with public administration and defence."
But they add, "On the demand side, growth rates of government final consumption expenditure (GFCE) at constant prices recorded an estimated increase of 4.1%, against 16.5% during Q2 of 2016-17... The growth of private final consumption expenditure (PFCE) moderated at 6.5%, compared with an increase of 7.9% in Q2 of 2016-17..."
The economists predict, "Higher car sales and enhanced international passenger traffic indicate the swelling of urban consumption expenditure. In the near term, the urban and government consumption expenditure will go up due to the impact of the Seventh Pay Commission award. Besides, higher sales of two-wheelers and tractors point to some upward movement in rural demand."
However, they underline, "The stressed balance sheets of banks and corporations have continued to act as a drag on investment activity. Households’ investment in dwellings, other buildings and structures have remained subdued as inventories rise on the hope of steep price corrections."
Giving the example of Mumbai, the economists say, "In the Mumbai Metropolitan Region alone, an estimated 350,000 houses (52% of inventory) under construction are unsold, according to Cushman & Wakefield and realty data analytics firm Propstack."
The economists quote Reserve Bank of India (RBI) to say that "new investment proposals declined significantly in Q2 of 2017-18 in terms of both numbers and value. Only 403 new projects were announced, the lowest since Q1 of 2004-05. Plant load factors in thermal power plants underwent a sustained decline, largely reflecting weakness in demand from financially stressed distribution companies."
Questioning "the predominance of consumption-led growth" as a matter of "serious concern in terms of sustainability", the economists say, it "can arguably lead to a slackening of future growth", as noted by RBI, which showed how it was found to have "a negative impact on GVA growth one-year ahead by 1.39 percentage points at 5% statistical significance level."

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*Freelance writer

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