Will the GDP Growth Rate Be Lower Than the CSO Estimates?

Wed, 11 Jan Pre-Open

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Last week, the government estimated that the country's growth rate will slow down to 7.1% in FY17 compared to 7.6% in FY16. This is the slowest growth in the last three years.

As per the Central Statistics Office (CSO), India's GDP is expected to slow down to 7.1% in FY17 due to a slump in manufacturing, mining and construction activities. The CSO did not factor in the impact of demonetisation when it made this announcement on November 8, and the estimates are based on sectoral data available till October.

Projecting GDP growth for the full year by extrapolating trends upto October 2016 in some sectors leaves room for several errors. This is especially true for cash-intensive sectors such as construction, retail trade, hotel, restaurants and transportation.

The CSO estimates also reveal some other significant facts.

The growth in the economy in FY17 has been supported by government consumption, as the government implemented the Seventh Pay Commission recommendations and the One Rank One Pension rule. The growth in government final consumption expenditure (GFCE), if the CSO's estimates are correct, will account for 33% of the growth in GDP at constant prices in the current fiscal year. This is a very high proportion. Similarly, private sector consumption is estimated to contribute slightly more than half of the total growth in GDP. This implies that the economy continues to rely on only one engine of growth - i.e. consumption.

If we leave out government consumption from the GDP figures, growth in the rest of the economy comes down dramatically.  Given that the vast majority of people work in the private sector/unorganised sector, it's not a pretty picture.

Similarly, According to the CSO, growth in gross fixed capital formation at constant prices, is expected to be a negative 0.2% in FY17. Growth in the economy will only come when fixed capital investment picks up.

Not to mention, growth in the construction sector, which is the main source of employment for the masses, is expected to be a mere 2.9% this year, a four-year low. That doesn't bode well for employment growth. Similarly, the 'trade, hotels, transport, etc.' sector has seen a considerable deceleration, which is another big source of employment for the masses. Growth in this sector is at a five-year low.

The CSO believes (even without taking into consideration the impact of demonetisation) economic growth this fiscal year will be the lowest in three years. This means, after factoring in the effects of demonetisation, growth would be even lower than 7%.

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