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IASbaba Big Picture RSTV Analysis- GDP numbers & Monetary Policy

  • IASbaba
  • December 4, 2015
  • 4
IASbaba's Daily Current Affairs Analysis, Rajya Sabha-Big Picture
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The Big Picture – GDP numbers & Monetary Policy

 

Quick facts about this quarterly growth

  • GDP grew at 7.4% compared to 7% in previous quarter.
  • Growth was led by services and financial sector like in previous one.
  • Manufacturing sector recorded huge growth of 9.3% this quarter compared to 7.2% in previous quarter.
  • Agriculture sector also registered growth of 2.1%.
  • Construction sector saw decrease in growth from previous quarter.
  • Share of private consumption expenditure fell marginally.
  • Share of gross fixed capital formation also fell marginally –> decrease in investment.
  • Output of 8 core industries fell to 3.2% compared to 9% registered last year.
  • 8 core industries contribute almost 38% of weight of items included in index of industrial production (IIP).
  • Cement sector recorded highest growth among all 8 core industries.
  • RBI held Repo Rate steady after pick up in GDP.

Analyses of the GDP growth

What we should be happy about —

  • Indian economy remained outside of slowdown in economy of emerging countries like Brazil, Russia and China. Most of the slowdown is attributed to Brazil & Russia.
  • India’s contribution in world economy has increased in past years and will increase to 3% by 2020.
  • Reforms brought by government are showing positive trend.
  • There has been recorded 2.1% growth in agriculture sector.

What we need to worry about —

  • Much of the growth of 7.4% is attributed to GDP deflator. Nominal GDP growth is quite depressing at 5.5%.
  • Growth in agriculture sector also creates suspicion because of 2 consecutive droughts and there is high degree of approximation in calculation of growth in agriculture as the data about growth comes 2 seasons later which could be influenced.
  • Demand in Rural areas has been weak showing different ground reality. Farmer income has not increased and because of which demand in rural areas is low. Present increase in manufacture sector in this quarter, therefore, can be owed to urban areas. This implies manufacturing sector could grow much further with increase in demand.
  • 39 listed banks had weak balance sheets showing 3.5 lac crore as bad loan.
  • Growth is not really inspiring as it is not providing enough confidence among bankers to play around the interest rate. This is shown by the fact that even though RBI has cut the policy rate by 150 basis points, the banks have only cut the interest by only 50-60 basis points because of increasing NPAs.
  • CPI has picked up again and has increased to 5% this quarter. This is why RBI didn’t cut the policy rate.
  • Investment cycle has not been revived upto its mark. Present growth in manufacturing is because of government investment and this can be seen in increase in growth in cement sector because of investment in infrastructure by the government.
  • Manufacturing sector though recorded growth but its growth didn’t bear out of IIP. 8 core industries showed a decline even though they contribute upto 38% in manufacturing sector.
  • With increase in 23% in income by 7th Pay January, 2016 onwards will lead increase in demand, but how of it will result in investment is cause of concern.
  • There have been concerns over methodology used in calculation of GDP and statistics provided in its calculation.
  • High growth rate aren’t aligning with leading indicators like bank credit, bank growth, IIP etc.

 

Way forward

  • 8 core industries need to be strengthened by introducing reforms. Major firms are looking over reforms in land acquisition, uniformity in labour laws, reforms in company laws which are not in sync with MSME.
  • For future growth, development of infrastructure is necessary.
  • Rural development should be focussed upon and develop strategies to increase farmer’s income to increase demand in rural areas.
  • Investment cycle need to be revived by strengthening banks to deal with NPAs.

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