The state of the Indian economy

The GDP numbers point to a recovery, but given the number of caveats involved, it might make sense to wait for the third quarter’s numbers to see whether this is sustainable

Is the economy expanding?

Is manufacturing growing?

Is consumption-driven growth back?

Is investment demand back?

These are important questions. They should also be questions to which there can only be one correct answer.

Let’s then try to answer them:

1. Yes. According to the latest gross domestic product (GDP) data, the economy expanded by 7.4% in the second quarter of 2015-16. There is an ongoing debate on the representativeness of the new GDP series, but be that as it may, the 7.4% growth marks an improvement over the 7% growth rate seen in the previous quarter and is higher, albeit marginally, than what many expected it to be. It also comes on the back of the 8.4% growth in the second quarter of 2014-15.

2. Yes, but with caveats. The GDP data shows that manufacturing grew 9.3% in the second quarter of 2015-16. The Nikkei India Manufacturing Purchasing Managers’ Index, released a day after the GDP data was released, has fallen to an over two-year low of 50.3, although it remains the highest among emerging economies in Asia. China’s is at 48.6. Any number over 50 indicates expansion.

3. Yes, but again, with caveats. The GDP data shows that both private and government consumption are growing at a healthy rate (the first by 6.8% and the second by over 5%). There is also anecdotal evidence of an urban-centric spike in demand for certain products and services. A recent revision in pay of government employees that kicks in early next year should power the sails of the consumption economy to some extent. The full impact of the ongoing agrarian crisis, though, is yet to be reflected in the rural economy.

4. Yes, surprisingly. The cold hard numbers show that gross fixed capital formation accounted for almost 30% of GDP growth in the second quarter of 2015-16. Much of this, as the Reserve Bank of India acknowledged in its policy on Tuesday, 1 December, is probably on account of public investment. The poor order book position of some large equipment makers and low capacity utilization across sectors seems to suggest that private investment may not follow immediately.

What does this mean for India? The numbers point to a recovery, but given the number of caveats involved, it might make sense to wait for the third quarter’s numbers to see whether this is sustainable.

If those numbers are similar to the second quarter’s, 2016-17 might well be a better year for the Indian economy.