GDP: Slowing private consumption a concern

The GDP growth for the second quarter of the current fiscal at 6.3 per cent has been broadly in line with expectations, coming on the back of disruptions caused by GST and the lingering impact of demonetisation.

While the gradual recovery is heartening, given that the government spending this year has been front loaded, slowing private consumption for the second quarter in a row, is worrisome.

Government spending has been a key growth driver in FY17. Much of the front loaded spending this fiscal has not been enough to spur private consumption so far. This could prove a hurdle in the overall growth numbers for the full year.

What the Q2 numbers show Within manufacturing, consumer durables had been impacted significantly since December 2016, as suggested by IIP numbers. GST related disruptions had also impacted the performance in Q1. After decelerating to 1.2 per cent in Q1, the manufacturing sector growth bounced back to 7 per cent in Q2. But IIP growth numbers for September, surprisingly show that the activity turned weaker in a larger number of manufacturing industries, which reported below-5 per cent growth. After registering a positive 3.4 per cent growth in August, consumer durable IIP reported a fall of 4.8 per cent in September.

Nominal agriculture growth (GVA) that had dropped to an abysmal 0.3 per cent in Q1 due to falling prices, inched up to 3.7 per cent in Q2. Growth in real terms continues to slow from 2.3 per cent in Q1 to 1.7 per cent in Q2.

Government spending, however has slowed from 17.2 per cent in Q1 to 4.1 per cent in Q2. Private consumption too has eased from 6.7 per cent to 6.5 per cent. These remain key concerns for growth in the coming quarters. While gross fixed capital formation growth inched up to 4.7 per cent in Q2, from 1.6 per cent in Q1, its share in GDP has only dipped from 29.8 per cent to 28.9 per cent.

Sustainable growth Much of the growth in FY17 was led by government spending. In the current fiscal, given that there are risks to the Centre’s fiscal deficit target, there is little headroom to increase expenditure. Central government’s spending reached 60 per cent of the target YTD (April to October), while revenue receipts have reached a lower 48 per cent of the target during the same period. Consequently, Central government’s fiscal deficit has reached 96 per cent of the target so far. Of course, this does not include the entire divestment proceeds of over ₹50,000 crore. But even if we include this, the Central government’s fiscal deficit has reached 92 per cent of the target so far.

The advancing of the Union Budget by a month helped to front load government spending this year. Government spending is already up 12 per cent YTD. This compares with the budget estimate of 8.7 per cent growth for FY18 (revised from 6.6 per cent budgeted earlier as actual expenditure for FY17 was revised down).

Going ahead, the Centre will be faced with a tough decision — to cut spending and stay the course on fiscal deficit which could further weaken growth prospects, or allow itself some leeway to deviate away from the fiscal target and scale up spending.