The GDP growth numbers for Q1FY16 stood at 7%, which is higher than the 6.7% achieved in Q1FY15 but lower than the growth number of 7.5% in Q4FY15. It is surprising that the GDP growth rate figure is lower than the gross value added (GVA) growth rate, which is 7.1%. Although the GVA numbers are broadly in line with market expectations, the difficult part is reconciling the GDP numbers.
The growth in net indirect taxes (indirect taxes net of subsidies) at current prices in Q1 is 39.9%, which is mostly in line with the increase in indirect collection in Q1, at 37.4%. However, this increase includes the rise in tax collection due to changes in marginal tax rates during Q1. After stripping all the additional measures, indirect tax collections increased by 14.5% year-on-year in Q1FY16. The real indirect taxes expanded by only 6.5%. What is puzzling, though, is that the indirect tax deflator shows an increase of 31.4% in Q1FY16, against a rise of 2.6% in Q4FY15. We believe changes in marginal tax rates may not be the only issue (there were changes in Q4FY15 also, but still the gap between real and nominal numbers were not that high) and the devil possibly lies in the details.
Similarly, the GVA deflator has increased to 0.1% from minus 0.1% in Q4FY16. Again, if we look closely at the WPI and CPI numbers over successive quarters, we will find that the GVA deflator was closely mimicking WPI till December 2014. However, after December 2014, there seems to be increasing divergence between the two. The only compelling reason that we can think of is that during the first quarter, although the import costs reduced, mostly due to fall in crude prices, the exports contracted more in comparison to imports, resulting in net deterioration in terms of trade.
The valuables component of the GDP also registered negative terms of trade due to fall in gold prices and falling export component of gold export because of the slack in external demand. Hence, on net basis, the GDP deflator may have risen. However, this argument does not fully suffice the increase, as India has a negative external balance with the rest of the world.
Elsewhere, there is another important point that we are missing out. According to the international System of National Accounts (SNA) 2008, revenue earned only from pure banking business (deposits and credit) and not from other sources like investments etc is taken for consideration in the GDP. The argument is that such activities do not lead to any asset creation. As a counter argument, India being the only country in world where SLR requirement is mandated, treasury income of banks is considered an important source of income (more so now), as other sources are impacted due to stress in assets. In particular, in 2015-16, the business of banks has been lower due to sluggish economic environment, high base effect, lower oil prices, weaker corporate demand for bank loans etc. This may lower the banking business contribution to the GDP, even on a going-forward basis. Interestingly, a logical corollary of this argument could be that since banking business is in financial intermediation, should we then consider it at all in GDP estimation?
On the other side, the inclusion of stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as regulatory bodies such as SEBI, PFRDA and IRDA, has increased coverage to capture growth in the financial sector. As of now, it seems that the banking contribution may have more than outstripped the later categories of business in the “financing, insurance, real estate and business services” sector.
Let us come to the other aspect now. The Budget estimates had pegged GDP growth at 11.5% and the fiscal deficit at 3.9%. However, if the nominal growth slips to current level at 8.8%, the Budget estimates of the fiscal deficit will propel the fiscal deficit-to-GDP ratio 20 bps higher to 4.1% due to the lower-than-expected denominator.
The immediate implications, more specifically, would be in meeting the gross fiscal deficit target of 3.9% of GDP in 2015-16—a little more challenging than at present. Therefore, if the government were to hold on to its revised fiscal consolidation path, it has to either increase its revenue by R21,192 crore or decrease its expenditure by Rs 21,192 crore to maintain the fiscal deficit at the initially projected 3.9%. A reduction in capital expenditure will be detrimental for growth, so the government has to find out ways to increase its revenues so that it adheres to its fiscal arithmetic. In such a case, disinvestment will again become the key to resource mobilisation. The only solace could be, given that value added in the manufacturing sector may continue to be positive, this may have a favourable impact on tax collections.
Despite the cynicism, we believe the growth outlook is still positive. There are a number of consumption-driven sectors which are showing high EBIDTA growth, which bodes well for future economic growth. Looking ahead, growth in order inflow in FY16 in capital goods segment is also expected to be in the range of 15-17%, driven largely by state utilities. However, pricing pressure still persists in the system due to excess manufacturing capacity and lower opportunities. As the government is taking steps in the right direction in terms of policy action, we believe that execution will pick up from H2FY16. Therefore, positive corporate sector outlook indicates greater value addition in manufacturing, contributing favourably to GVA going forward.
(Tapas Parida contributed to the article)
The author is chief economic advisor, State Bank of India. Views are personal