Given how GDP growth moderated to 7.3% in Q3FY16 from 7.7% in Q2FY16, it is surprising the CSO has forecast a 7.6% growth in GDP in FY16, higher than FY15’s 7.2%. It is hard to reconcile this acceleration with the ground reality because corporate results remain lacklustre and IIP grew just 3.9% in April-November. Given that the farm sector contracted 1% in Q3FY16 and that rural incomes are stagnant, the optimism is baffling. The CSO seems to be betting on a better contribution from net exports; that is, slowing imports will more than cushion exports falling 13 months in a row. Also, a smaller petroleum import bill will help. But while the headline numbers may look good, the quality of growth will not. Investment growth has slowed in Q3, so how gross fixed capital formation (GFCF), at constant prices, will rise by 5.3% in FY16—the highest in the last four years—is hard to understand; more so, empirical evidence shows little capital expenditure. While the growth does come off a small base—4.9% in FY15 and 3.4% in FY14—and there is routine capex that is taking place, the 30% surplus capacity in the economy does suggest slowing capex, more so with the global economy in the shape it is.
In fact, there is virtually no evidence that suggests companies are adding capacity, except probably for telecom firms rolling out networks. What is hardest to understand is how manufacturing is chugging along at over 12% though it is possible that in some segments—commercial vehicles for instance—the smaller base is helping. For the government, the lower nominal GDP growth of 8.6%, the lowest in four years, will mean a cut in expenditure if it is to meet the 3.9% of GDP deficit target—in constant prices, government expenditure is in any case projected to grow at a mere 3.3% for FY16. Smaller spends will again stymie growth, so it doesn’t look like growth in Q4FY16 is going to be even modest, let alone robust. In fact, the assumption that FY16 private consumption will grow 7.6% implies a 12% growth in Q4—double that in Q1 to Q3.