For the last few months it was well recognised that GDP growth for fourth quarter in FY19 would be lower than the previous quarter and it would pull down the yearly GDP growth. The IIP for the year at 3.6% was lagging behind with agriculture sector yet to progress on a high note. Thus, the growth of the economy at 5.8% for fourth quarter and 6.8% for the full year was no big surprise.
The data on national income have put forward some specific areas that need focus in order to rejuvenate the economy. Now, that the political stability has been achieved, it would be relatively easy for the government to pursue pragmatic economic policies for the welfare of the people at large.
Indian economy at the present structure is led by both consumption and investment. The private final consumption expenditure (PFCE) at 56.9% in the year (56.3% in FY18) plays a critical role in boosting up the demand for the commodities. The household expenditure on consumer durable products, including passenger cars, two-wheelers, tractors, bicycles and various white goods and housing determines the demand pull for these segments.
Its spending on recreation and travels provides succour for railways, roads, aircrafts and ships. The rise in household expenditure hinges on easy and cost effective availability of loans from the banks (for personal and housing loans) as well as on the rise in disposable income of the households.
It is seen that there has been a 12.3% growth in non-food credits by the banks as compared to 8.4% growth in FY18. The flow of credit for housing has grown by 15.2% in March 2019 against 2% growth in March 2018. The credit flow to construction and infrastructure sectors has also shown respectable growth during FY19.
The per capita income in FY19 at `1,05,688/- (constant prices) has achieved a growth rate of 5.5% against 5.8% growth in FY18. The government also lends support to consumption and in FY19 the share of government expenditure (constructing office buildings, housing complexes for its employees, interest payments) comprises 10.7% share of GDP.
Thus, total consumption by both private sector and the government sector has taken about 67.6% of GDP in FY19. The total investment in the economy approximated by gross fixed capital formation (GFCF) has made some progress taking the share in GDP from 30.8% in FY17 to 31.4% in FY18 and pegged at 32.3% in FY19. For fourth quarter, the share of GFCF in GDP came down to 30.7% of GDP from 33.4% in third quarter.
Despite the fact that it is largely the public investment that accounts for rise in share of GFCF, it is the stagnant or declining share of private corporate sector investment in roads, airports, ports, urban infrastructure and affordable housing that has to take the prime responsibility of slow growth in investment in the economy.
A stable government for the next 5 years is likely to improve the business sentiments and bring back the animal spirits to leverage the investment scenario. The monetary policy of RBI to be issued shortly for FY20 must consider the capping of rise in inflation rate (WPI and CPI) below 3.5-4% (April 2019 data) as suitable for giving impetus to higher investment by bringing down the repo rate by another 25 basis points to 5.75%.
It goes to the credit of the government that fiscal deficit in FY19 has been managed to be pegged at 3.4% of GDP. However, the gap in tax revenue (Budgeted vis-à-vis actual) was instrumental in restricting both revenue and capital expenditure of the government during the year.
As regards steel demand, it is the growth in investment (asset creation) that is more steel intensive compared to consumption growth (durable goods). It is observed that investment in infrastructure (roads, railways, airports, ports, ships, aircrafts, urban and rural infrastructure, affordable housing) generates demand for steel intensive engineering goods, fabricated products that are extensively used in all infrastructure projects.
From the expenditure angle, the GDP growth is also dependent on net exports (exports minus imports) share. For the last few years, India has been experiencing a large negative net exports ranging from (-)1.0% in GDP in FY17 to(-)4.5% in FY19.
For steel, India became a net exporter in FY18 but reduced to a net importer once again in FY19. In the current year the export growth in steel that continues to be lower than the import growth is, however, constrained by the ongoing trade wars between the US and China and it has assumed a significant proportion of world trade and threatens to destabilise the global economy.
The steel consumption growth in FY19 at 7.5% against a GDP growth of 6.8% may yield a steel intensity of 1.10 with GDP. This point elasticity may not be used for forecasting purposes which require the elasticity factor (known as arch elasticity) over a period of not less than 12-15 years. For a limited period during 2011-12 to 2018-19 for which revised GDP series is available, the steel intensity comes to 0.85.
(The author is DG, Institute of Steel Growth and Development. Views expressed are personal)