More than the removal of structural challenges, the latest spurt in growth could be the result of push factors, such as the Union budget’s tax cuts that were followed by the GST reforms
The numbers tell a cheery story. The Indian economy has clocked a growth rate of 8.2% in the July-September quarter of this financial year. The impressive figure was even higher than that — 7% — projected by the Reserve Bank of India for the said quarter. Manufacturing, at 9.1%, and services on the production side appear to be the engines of this unanticipated surge, with the former responding to consumption demand before the festive season. Private consumer spending rose to 7.9% on a year-on-year basis in the second quarter. That growth was on an ascendant path despite the turbulence ushered in by Donald Trump’s regime is commendable. Understandably, Prime Minister Narendra Modi has attributed the rise in growth to his government’s policies. The chief economic adviser is of the opinion that the showing in the first six months of the fiscal year raises the hope of India ending the financial year with a growth rate of 7%, which is higher than previously estimated.
Whether this target can be achieved or not requires scrutiny of some specifics. Low inflation had a positive impact on growth in this quarter. This tailwind, though, is unlikely to remain constant, leading to a possible deceleration in growth in the months to come. More than the removal of structural challenges, the latest spurt in growth could be the result of push factors, such as the Union budget’s tax cuts that were followed by the goods and services tax reforms — the latter’s impact will be experienced in the third quarter too. Can such episodic boosts, as opposed to structural reform, sustain growth in the long run? Another issue that needs to be addressed concerns the veracity of India’s data quality. This has come under renewed focus after the International Monetary Fund gave the second-lowest grading to India’s national accounts statistics owing to alleged methodological infirmities. That India continues to use 2011-2012 as the base year in its GDP estimation, notable discrepancy in the two ways of measuring GDP, the lack of granular data on investment, absence of adjustment on quarterly data, among other factors, have deepened the IMF’s frown on India’s data quality. New Delhi must not be in denial or dismissive of these
concerns. Reform must extend to its data methodological edifice too.
