Economic recovery could be fuelled by consumption, but sustaining momentum will require private investment

The Central Statistics Office’s provisional estimate of national income released on Tuesday states the economy grew at 7.6 per cent in 2015-16 compared with an estimated 7.2 per cent in the previous year. The Indian economy’s remarkable fourth quarter performance clearly indicates it has been aided in no small measure by a consumption-led demand boost in 2015-16. Sequentially, the 7.9 per cent jump in the GDP growth rate in Q4 (January-March 2016) is the highest among the four quarters in the last financial year. A robust private consumption growth of 7.4 per cent during the year helped the economy cross the $2 trillion-mark. The CSO data surprisingly shows a sharp increase in “discrepancies” (at Rs 1.43 trillion) at constant prices in the quarter ending March 2016. “Discrepancies” is the difference in GDP numbers measured by the production and expenditure approaches. But this is not out of the ordinary and has been high during the last decade.
As a series of reports on the state of the economy in this newspaper last week said, the consumption story will play out fully during the current financial year and the next year too on the back of the Pay Commission awards, a good monsoon that will improve rural incomes, easing liquidity and lower interest rates. India, given its demographic profile, will remain a consumption story for a long time given that consumption demand accounts for 54 per cent of the GDP. Green shoots of recovery — higher light commercial vehicle and three-wheeler sales, as also firming up of freight rates — visible since the beginning of calendar year 2016 have brought excitement back to the outlook. What is critical though is for these green shoots to strike roots so that the growth momentum is sustained. This is where private investment has to take the baton from the government — both at the Centre and in the states. Gross fixed capital formation — an indicator of investment by the private sector — slowed down to 3.9 per cent in 2015-16 compared with 4.9 per cent in the previous year.
Private investment continues to remain moribund and companies are nowhere close to 80-85 per cent capacity utilisation, levels at which they start thinking of expanding and making fresh investments. Coupled with the pain of excess capacity is the debt burden that corporates are carrying on their balance sheets and risk aversion among banks to lend, even if they can. It is during these times the Centre can boost sentiment further by pushing through legislation such as the Goods and Services Tax that alone will add 1.5-2 per cent to the GDP. The states, which are the principal point of contact for investors, can overhaul their governance structures to significantly improve parameters that add to the “ease of doing business”.


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