The estimates of gross domestic product, or GDP, for the fourth quarter of 2014-15 and the provisional estimates for the whole year were published last Friday. The full-year headline numbers did not look too surprising; GDP was assessed to have grown by 7.3 per cent over 2013-14, a marginal downward revision from the 7.4 per cent projected in the advance estimates in February. That would seem to broadly reinforce the perception that the economy is in slow-and-steady recovery mode; growth is up just slightly from the 6.9 per cent recorded in 2013-14. The absolute values of the growth numbers are, of course, still difficult to interpret because the back series is yet to be published. Until this happens, it is not easy to say whether the economy is doing well or badly relative to its past performance.
However, going beneath the aggregates, there are considerable reasons for concern. There seems to be a worrying decline in quarterly growth in gross value added, or GVA. In the July-September quarter, it grew 8.4 per cent; in October-December, 6.8 per cent; and in January-March, 6.1 per cent. Some of this may be because of a slowdown in government expenditure due to fiscal constraints. But the trend should nevertheless serve as a wake-up call about the fragility of the recovery. Indeed investment numbers suggest fragility, too. Gross fixed capital formation, or GFCF, as a percentage of GDP, which measures enhancement of productive capacity, has actually been on a decline. It was 31.9 per cent in 2012-13, 30.7 per cent in 2013-14 and 30 per cent in 2014-15. This is a big negative for long-term growth. This pattern is entirely consistent with indicators like corporate profitability and bank credit. The ongoing debate over the government’s first-year performance is highlighting the persistent reluctance among companies to increase capacity and it is incumbent on the government to diagnose the problem and offer quick solutions. One important reason is likely to be the lack of progress on reactivating infrastructure investment, notwithstanding administrative and financial actions. But, whatever the reason, if the investment cycle does not turn up, reviving and sustaining growth will be extremely difficult.
Looking at sectoral performance in terms of GVA, agriculture virtually stagnated, growing by 0.2 per cent. The very uneven performance of the monsoon in 2014 is probably the cause – and possibly the weather disruptions in early 2015. In fact, there was a decline in GVA in agriculture in the January-March quarter. Given the forecast of an indifferent monsoon this year as well, there is going to be enormous pressure on the government to provide short-term income transfers to agriculture. This makes it all the more important that a structural reform blueprint for agriculture is laid out quickly. As regards manufacturing, the estimates show the sector as having grown by over seven per cent during 2014-15. High levels of growth for manufacturing are a significant unresolved issue with the new data series and it must be addressed as quickly as possible. The bottom line is that in the absence of a reform push in areas like agriculture and infrastructure, growth will remain range-bound. Comfortable macroeconomic conditions and the political mandate of the government provide the best possible circumstances for such a push. Time is slipping away.