Economic growth of 8.2% for the June quarter may have beaten all estimates, but the big question is: what kind of growth is it? Is the economy firing on all the engines of domestic consumption, investment demand and external demand?
Let’s look at the numbers. The anecdotal evidence of a spurt in consumption growth is certainly borne out by the GDP data. Private final consumption expenditure (PFCE) growth rose to 8.6% in the June quarter from 6.7% in the preceding March quarter. What’s more, the growth rate has increased despite an unfavourable base—PFCE growth in the June 2017 quarter had jumped to 6.9%, compared to growth of 4.2% in the March 2017 quarter.
Sliced another way, the data shows that private consumption was 54.9% of GDP at constant prices in the June quarter, compared to 54.6% in the March quarter. Clearly, consumption growth is very strong.
What about investment demand? We have been waiting endlessly for investment demand to pick up and do the June numbers show it’s finally happening?
To be sure, the 10% growth in gross fixed capital formation, at constant prices, certainly looks impressive. But here’s the catch: in the March quarter, gross fixed capital formation (GFCF) growth was even higher, at 14.4%. Was that due to a lower base? It wasn’t—the March quarter year-on-year growth in GFCF of 14.4% was on top of 5.95% growth in the March 2017 quarter. But the June 2018 quarter’s GFCF growth of 10% was on top of a piffling 0.8% growth in the June 2017 quarter. Simply put, growth in gross capital formation in the June quarter slowed down, in spite of a favourable base effect. In other words, there’s been a loss of momentum in investment demand in the June quarter.
A rather simpler way of saying the same thing is to point out that GFCF amounted to 32.2% of GDP at constant prices during the March 2018 quarter and this slipped to 31.6% of GDP in the June quarter. That fits in with anecdotal evidence of capital formation largely being driven by government orders, with the private sector still lukewarm to greenfield investments. The Reserve Bank of India’s recently published annual report talked of green shoots in infrastructure, but also said, “Stalled projects, both in numbers and value, declined in Q1:2018-19; however, new investments remained lukewarm uniformly across the government and the private sectors.” The hope is this trend will soon change.
What about the external sector? As the chart shows, the trade deficit on goods and services shot up sharply, partly due to higher crude oil prices, but also on account of other imports. The drag on GDP from the external sector continues to increase.
In short, the June quarter numbers indicate that consumption is still driving the Indian economy. Consumption growth has been aided and abetted by the rise in personal lending. As RBI’s annual report pointed out, liabilities of the household sector went up from 2.4% of gross national disposable income in 2016-17 to 4% in 2017-18. RBI’s figures for sectoral deployment of credit from banks show that as of 31 July, credit card outstandings were up 30% year-on-year, on top of a 32% growth in the preceding year.
What is the consequence of this consumption-led growth? Inflation according to the GDP deflator—the most comprehensive measure of inflation in the economy—moved up to 4.8% in the June quarter from 2.4% in the March quarter. There are strong reasons for RBI hiking interest rates.
It is imperative for investment demand to pick up in the near future. Otherwise, as a section of RBI’s annual report last year titled Is consumption-led expansion sustainable? A case study of India pointed out, “Consumption-led growth can arguably lead to a slackening of future growth if it entails growing imbalances due to limits to capacity creation, and rising debt burdens, particularly for households.”