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2 March 2017 Editorial


2 MARCH 2017

Resilience reaffirmed

The resilience of India’s economy has been reaffirmed by the latest data, with both the third quarter and full-year growth estimates belying widespread concerns that the November 8 decision to withdraw high-value currency notes would significantly dampen momentum. While the Central Statistics Office stuck with its January advance estimate for gross domestic product in the 12 months ending March 2017 to post a healthy 7.1% growth, it projected GDP to have expanded 7%in the fiscal third quarter, reflecting only a marginal slowdown from the 7.3% registered in the preceding three-month period. Notably, this expansion occurred in the October-December quarter, when about 86% of the currency in circulation in the form of Rs. 500 and Rs. 1,000 notes was abruptly sucked out of the system, potentially resulting in what the Economic Survey termed an “aggregate demand shock” and the Reserve Bank of India referred to as “demand compression associated with adverse wealth effects”. Undergirding this better-than-expected performance were the agriculture, mining and manufacturing sectors and, interestingly, government expenditure. While the overall gross value added (GVA) in the third quarter is estimated to have increased by 6.6%, agricultural GVA in the period is projected to have surged 6%, a sharp quickening from the second quarter’s 3.8% pace and in stark contrast with the 2.2% contraction in the earlier year, as the near-normal monsoon in 2016 helped lift kharif crop output substantially. Mining and manufacturing GVA too appear to have done far better than in the preceding quarter, bucking the so-called ‘demonetisation drag’ to post 7.5% and 8.3% growth, respectively. Public administration, defence and other services clocked double-digit GVA growth: at 11.9%, a robust acceleration from the 7.5% in the third quarter of 2015-16.

It is only the financial, real estate and professional services segment, which is linked to consumption, that lagged, with the pace of expansion more than halving from the July-September quarter to a modest 3.1% increase. Chief Statistician T.C.A. Anant has said the government will continue to keep evaluating the numbers in relation to the impact of demonetisation, even as the CSO trimmed its full-year GVA growth estimate to 6.7% from the 7% projected in January. This 30 basis points cut in the GVA growth estimate is more in sync with the projection of one quarter of a percentage point to half a percentage point slowing in its baseline real GDP growth assumption of 7% that the Economic Survey had posited. The Survey had also made a cautionary assertion that recorded GDP growth would “understate” the overall impact of demonetisation as “the most affected parts of the economy — informal and cash based — are either not captured in the national income accounts or, to the extent they are, their measurement is based on formal sector indicators.” When dealing with statistics, it is safer to keep all the caveats in mind.


Withering highs

The forecast from the India Meteorological Department of above-normal temperatures over much of India in the summer months is bound to bring back memories of last year’s withering weeks. Global weather in recent times has come under pressure from the El Nino warming that began in 2015 and exerted its influence into the first quarter of 2016. What is significant is that the Australian international weather bureau says there is a 50% prospect of a similar phenomenon this year as well, making it a significant alert on hotter temperatures, and possibly a debilitated monsoon and weaker agricultural prospects. The early IMD forecast should help the official machinery to adequately prepare for public distress. A carefully planned school examination schedule could spare students the worst of the torrid season, and this should be among the top priorities. As the temperature edged past 40o C last year, schools in some States decided to extend their summer vacations by a week or two, something that may become necessary again. Urban water distress poses another challenge, because big cities in several States have not received adequate rainfall to replenish their reservoirs and are using up groundwater at unsustainable rates. For farmers, another harsh period would add to their difficulties, requiring a sensitive approach to their needs. Administrative decisions for summer management will need to be reined on the basis of coming IMD updates, although the overall trend appears to be clear.

Temperatures in different parts of the world may have variations due to local weather phenomena, but as the U.S. space agency NASA has pointed out, there has been a record three-year warming trend, with 2016 the hottest; 16 of 17 warmest years based on globally-averaged temperatures occurred since 2001. The effect of El Nino on the global temperature average is only a small part of the overall rise, indicating that the trend could be correlated with the rise in greenhouse gases. India, a major emitter of GHGs, has classified 2016 as the century’s warmest year, with an increase of 0.91o C over the long-term average; NASA’s corresponding global figure is 0.99o C. These are clear signs that the world must shift away from further high-emission pathways in the economy and adopt leapfrogging technologies. It is also a call for policy initiatives to build resilience by improving water harvesting and expanding tree cover, including in cities. For rural India, building surface irrigation facilities such as ponds through the employment guarantee scheme and climate funds would seem a natural choice, while urban water supply augmentation needs more reservoirs to be built. If this year’s forecast comes true, though, there is no escape route. The only hope would be an early date with the monsoon.

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