One of the many oddities of government data these days is its unpredictability. In February, many expected third quarter GDP numbers to be low as it came close on the heels of demonetisation. But the data was better than expected. Again in the fourth quarter, analysts foresaw an upward momentum, considering the revised Index of Industrial Production (IIP) and Wholesale Price Index (WPI) series, but official figures released on Wednesday showed the economy had slowed down.
The 6.1 per cent GDP growth in Q4 was the lowest in two years, confirming the severe impact of demonetisation, but officials have a different narrative. As per Chief Economic Advisor Arvind Subramanian, the economy has been slowing steadily since July and what we saw in Q4 was nothing but even sharper deceleration.
The real gross value added, considered a better measure of national income as it excludes taxes and subsidies, was revised downwards by 90 bps in Q4, but annually, the revision stood at a mere 10 bps. This was perhaps owing to the 170 bps jump in manufacturing and a 70 bps jump in finance, though RBI data pegs credit growth at historic lows. Agriculture largely remained insulated, thanks to Nabard that stepped in directly during the sowing season.
But better agri output alone can't assure full recovery. Industrial investments continued to sulk, while government spending remained the lodestar of growth, for the fourth consecutive quarter. But this double digit growth in public expenditure could strain the fiscal deficit target.
Policymakers tighten or loosen their monetary (interest rates) and fiscal (cutting taxes or raising spending) stance to prop up growth. The latest data may compel RBI to lower rates, but it's uncertain if animal spirits can be revived. An early budget next year could result in upfronting of expenditure, plus GST may affect tax buoyancy. So expect further divergences in fiscal trends, but it may not reflect the full import of ground reality.