Amidst Data Fog, What We Know About The Indian Economy

A series of revisions to gross domestic product data for the past few years have left underlying economic conditions in the economy shrouded in fog. Is growth in the economy weakening? Is that weakness driven mostly by the rural economy? What explains the pick-up in investment?

While many have questioned the large revisions to past GDP data, the available information throws up a few discernible trends:

• Rural incomes are under pressure because of the decline in farm prices, as reflected in nominal growth in the agriculture sector. The farm sector, together with mining, are two segments responsible for lower growth in FY19.
• Atleast two crucial employment generating sectors of the economy — construction and manufacturing — are showing stronger growth. On the flip side, the services sectors is reflecting some sluggishness.
• The years of divergence between strong consumption growth and investment growth have reversed, with investment now growing at a stronger clip when compared to consumption.

The Farm Sector Is Under Stress

There is now no denying that the farm sector has seen terms of trade turn adverse over the last two financial years. A large part of the inflation control in the Indian economy has happened via a decline in food price inflation. While this benefits consumers, it hurts producers of food items.

Annual GDP data over the last three years tells this story clearly. In FY17, nominal growth in agriculture, which includes output and price impact, was running well above real growth, which reflects just increase in output. In the last two years, this equation has turned on its head. While output has grown marginally, prices for that output have not risen.

In FY19, at 3.2 percent, nominal agricultural growth was above real growth but only by 50 basis points. The agricultural sector grew at 2.7 percent in real terms against 2 percent in nominal terms in the third quarter. In the second quarter as well, real growth was higher at 4.2 percent compared to nominal growth of 3.2 percent.

Lower nominal growth means that farm incomes continue to take a hit, said Pronab Sen, former chief statistician of India.

Consumption Growth Is Slowing

The second clear take way from the data is that consumption growth is slowing. The divergence between consumption growth and investment growth, which was in favor of the former has now flipped.

Private consumption expenditure grew by 8.4 percent in the third quarter of FY19, compared to 9.8 percent in the second quarter, pushing down GDP growth. However, investments held up, growing by 10 percent in the third quarter, as against 9.3 percent in the second quarter of FY19

Weakness in urban as well as rural private consumption was indicated by high frequency indicators such as auto sales, aviation passenger traffic and fuel consumption, stated a note by IDFC Bank dated February 28, 2019. The moderation in rural consumption is likely because of sustained moderation in rural wages and subdued food prices that depressed agricultural incomes. Meanwhile, urban consumption is likely to have been impacted by higher crude oil prices in the beginning of the third quarter, rising interest rates and also possibly due to a slowdown in the lending by NBFC sector in the third quarter, the note added.

The slowing consumption is not just about the private sector, government consumption spending, too, has slowed, noted Kotak Institutional Equities in a note on Friday.

Some Parts Of Industry Are Faring Well

Not all news coming from the economy is bad.

Some parts of the economy are faring better than in the last financial year. Two of these sectors — construction and manufacturing — are employment generating sectors.

In FY19, growth in both construction and manufacturing surged. The construction sector grew 8.9 percent, while the manufacturing sector grew 8.1 percent.

The trend in construction growth shows the recovery is not knee-jerk but gradual and consistent, said Soumyakanti Ghosh, chief economist at State Bank of India. The construction activity has partly recovered due to the thrust on rural housing and the accelerated pace of completion of road and railway projects, Ghosh said.

Not everyone is convinced about the strength in manufacturing. Devendra Pant, chief economist at India Ratings and Research pointed to the volatile trends in the Index of Industrial Production. IIP growth slipped to 2.4 percent in December, showed separate data released by the government in February.