Going by the headline numbers, it would appear the economy is in good nick. GDP grew at a strong 7.6% in FY16, buoyed by a phenomenally strong 7.9% March quarter. But scratch the surface, and things are not quite so rosy. The sharp increase in ‘discrepancies’ apart—growth in this accounted for half Q4 growth—the numbers are a lot lower if the old method of calculating GDP is considered; economists at Bank of America estimate GDP clocked in just 4.2% in Q4FY16 and 4.9% for FY16. Even if one were to set these aside, growth in the March quarter has come essentially from an unexpectedly good performance in agriculture even though sown area actually fell and there was a smaller negative drag from net exports; non-farm growth moderated to 8.9% from 9.2% in the December quarter. Indeed, as some economists had forewarned, the overestimation in manufacturing data is beginning to correct—growth slowed from 11.5% in Q3 to 9.3% in Q4. But more critically, investments continue to fall, and slipped to 28.4% of GDP in the March quarter from 32.6% in FY15—for all of FY16, it was 31%. Fixed investments contracted for the first time in two years with the government capping expenditure to rein in the deficit.
While the government will no doubt continue to spend on capex, the small contribution from the private sector will rein in prospects for the economy this year; economists believe it could clock in 7.6% at best. This is despite the promise of a good monsoon, benign commodity prices and inflation, lower interest rates and a helpful base effect in areas like agriculture and manufacturing. Although interest rates may trend down, the sufficient or even excess capacity across sectors—estimated at close to 30%—will prevent companies from expanding their businesses at a time when the outlook on demand is at best hazy, especially in markets overseas. At firms such as L&T, for instance, order inflows are expected to look up by around 15% in the current year, but this comes off a small base. Economists now expect new projects to start taking shape only in 2017. The poor global trade outlook also takes away the boost exports give to GDP.
In the meantime, it is more consumption that is expected to keep the economy going. Higher salaries—partly resulting from the Pay Commission’s recommendations—and better rural incomes on the back of a bountiful harvest are what economists are betting on. Private final consumption expenditure grew at a brisk 7.4% in FY16, but government consumption expenditure slowed to just 2.2%. Moreover, not all the pickings from a good harvest may be channeled into consumption because a part of it may be used to pay off loans taken during the last two weak monsoons. The good news is that corporate earnings are looking up and that should support incomes.