How should one make sense of India’s recent growth trajectory? Growth in the fourth quarter surged to 7.4 per cent. Two quarters earlier, it had slowed to 5.6 per cent. But two quarters before that, it was at 8.4 per cent. What’s going on? It’s tempting to believe India saw a sharp and organic private sector slowdown and is now seeing a commensurately sharp recovery. Inevitable questions will follow: What caused the slowdown? What’s driving the rebound?

As tempting as that narrative is, it’s not borne out in the data. A closer read reveals a more mundane explanation of the growth gyrations in recent quarters: Sharp swings in the intra-year fiscal impulse in an election year and the resurgence of agriculture due to a strong monsoon. Indeed, the entire difference between softer GDP growth of 6 per cent in the first half and stronger growth (around 7 per cent) in the second half of the year can be explained by these factors.

First, government spending was heavily backloaded in an election year. Non-interest general government spending grew at just 2 per cent in the first half of the year but then surged to 15 per cent in the second half as the Centre and states rushed to meet budget targets. Second, subsidies were frontloaded, depressing net indirect taxes — and, with it, GDP growth — in the first half but then dramatically boosting both in the last quarter. Third, agricultural growth clocked less than 3 per cent in the first half but more than doubled to 6 per cent in the second half. Once you adjust for these “exogenous” factors, underlying growth is much more stable at about 6.5 per cent — which is where full-year GDP........

© Indian Express