Topic 1 : Reading the spike
Introduction: The Indian economy will grow at 7.6 per cent in the ongoing financial year (2023-24) as per the National Statistical Office’s second advance estimates of national income.
What are the latest estimates of GDP and GVA?
- GDP growth for the year has now been pegged to be higher than the NSO’s first estimate of 7.3 per cent.
- However, both estimates have pegged gross value added (GVA) to grow at 6.9 per cent this year.
- This could imply that the difference between the two estimates may, in part, lie in net taxes on products.
- This gap reflects in the third quarter data as well — while GVA growth has been estimated at 6.5 per cent, GDP growth has been pegged at 8.4 per cent.
Relationship Between GDP and GVA
The key difference between GDP and GVA lies in the treatment of taxes and subsidies:
- GDP = GVA + (Taxes on Products) - (Subsidies on Products)
In essence:
- GDP focuses on the final value of goods and services from the consumer's perspective.
- GVA focuses on the value added at each stage of production from the producer's perspective.
Why Both GDP and GVA Matter
- GDP:
- Used for cross-country comparisons of economic size and growth.
- Helps track the overall trajectory of the economy.
- GVA:
- Offers insights into the contributions of different sectors (agriculture, industry, services).
- Aids policymakers in designing sector-specific policies and incentives.
Reason for the gap in GDP and GVA rates
- According to analysts, the gap stems from a surge in net taxes on products.
- This may not be sustainable.
- There have also been substantial revisions in the previous data.
- Accounting for them, value added in the economy has declined from 8.2 per cent in the first quarter to 6.5 per cent in the third quarter.
Sector-wise GDP performance
1. Agriculture sector
- The sector wise data reveals the subdued performance of the agricultural sector.
- It has been estimated to grow at a mere 0.7 per cent in 2023-24, down from 4.7 per cent in 2022-23.
- Value added by the sector, in fact, fell by 0.8 per cent in the third quarter of this year.
2. Industrial Sector
- On the other hand, the industrial sector (mining, manufacturing, electricity, gas and water supply, and construction) has picked up pace, growing at 9 per cent this year.
- The healthy performance of the sector is on the back of a pick-up in manufacturing and a sustained performance in construction.
- The manufacturing sector, which had contracted by 2.2 per cent last year, is now expected to grow at 8.5 per cent this year.
- This also reflects in the data from the index of industrial production.
- Alongside, the construction sector is pegged to grow at 10.7 per cent this year, up from 9.4 per cent last year.
3. Service Sector
- The services sector, though, has seen a mild deceleration when compared to last year.
- Segments — trade, hotels, transport and communication, financial, real estate and professional services, and public administration — have grown at a slower pace this year.
4. Consumption and investments
- Despite the economy growing at a healthy pace, consumption continues to disappoint.
- Private spending grew by just 3.5 per cent in the third quarter, and is expected to grow at 3 per cent for the full year.
- This touches off questions. Investment activity, though, continues to remain heartening, growing at 10.2 per cent for the full year.
Conclusion: Implicit in the NSO’s latest estimates is that the economy is likely to grow at 5.9 per cent in the fourth quarter. GDP growth comes in higher than expected. Economy is likely to slow down in the last quarter
Topic 2 : The turbulent country
Introduction: Looking at the internal and external state of affairs of Pakistan, it needed a stable government desperately. However, its recent election has been a throwback to its past of widespread poll rigging and flawed mandates. It has resulted in a political muddle.
The outcome of the election
- No political party has a simple majority in the National Assembly.
- The single largest group of PTI-backed independents — who have since got themselves a party tag by joining the little-known Sunni Ittehad Council — is anathema to the army.
- Consequently, the second largest party, PML(N), is set to form the government with Shehbaz Sharif as Prime Minister.
- Following tough bargaining, PPP, the third-largest party in the assembly, has agreed to extend outside support to the government in return for Asif Ali Zardari being made president and some other constitutional posts.
- The combined strength of PML(N) and PPP barely touches the halfway mark.
- Therefore, PML(N) is also looking for the support of 20 to 25 legislators of the smaller parties, notably 17 of MQM-Pakistan, that have served as instruments for the army’s political engineering in the past.
Challenges for the new government in Pakistan
- The new government takes charge at a time when Pakistan finds itself in choppy waters — a precarious economy, sharp political polarisation and a fraught security situation.
- It will be faced with tough challenges, including PTI’s obstructionist tactics and widespread resentment against poll rigging.
1. The stability of government
- To begin with, managing the unwieldy coalition will in itself be a challenge.
- Cognisant of the onerous governance agenda ahead, PPP has so far refused to take any cabinet berths.
- The glue that kept PML(N) and PPP together in the last Shehbaz Sharif government — their shared anxiety about Imran Khan’s popularity — continues to exist.
- However, in case PPP continues to stay out, it will be free to question the government’s policies, and worse, still may ditch it if it sees political costs rising.
2. the meddling of the Army in governance
- Further, the setback suffered by the army as a result of PTI’s impressive showing in the election will not put it out of the business of governance.
- Having consolidated his position within the army following the PTI violence against some army establishments in May 2023, army chief Asim Munir has remained engaged in governance matters, including economic management.
- He is unlikely to step back.
- Nawaz Sharif has passed up the prime ministership in favour of his brother, who is more acceptable to the army, because of the poor numbers of his party in the National Assembly and the consequent greater vulnerability of the government to the army’s machinations.
- He has invested more in Punjab, where his party needs to revive its political fortunes, by giving the chief ministership to his daughter and political heir Maryam Nawaz.
- However, he will wield considerable influence on both the federal and Punjab governments.
- Because of the above pulls and pressures, the incoming government is likely to be weak and unstable.
3. Economy of Pakistan
- Budget deficits remain large and inflation is high.
- The country does not have the money to finance the annual external sector gap of $20 to $25 billion over the next few years. The short-term $3 billion arrangement negotiated by the first Shehbaz Sharif government with the IMF ends in March.
- Pakistan’s external creditors, including China, have been circumspect in lending more money or restructuring past loans till it enters into a longer-term arrangement with the IMF.
- This, therefore, will be among the top priorities of the new government.
- It will necessitate further belt-tightening not only by the common man, but also by the articulate and politically influential elite, thereby entailing large political costs.
- The PML(N) paid heavily for the harsh economic measures of the last Shehbaz Sharif government in the recent election, but seems prepared to incur further such costs to keep Imran Khan at bay, hoping the economy will stabilise in two to three years.
4. The deteriorating internal and external security
- Pakistan’s internal and external security environment has deteriorated.
- There has been a sharp spike in terror attacks by the Tehreek-e-Taliban Pakistan (TTP) and Baloch groups.
- The relationship with India remains frozen in a tense standoff.
- Tension has mounted with the Afghan Taliban, Pakistan’s erstwhile proteges, on the issues of recognition of the Durand Line as the border between the two countries and reining in the violent activities of TTP from Afghan soil.
- Things could take a turn for the worse.
- There was a flare-up with Iran recently.
- The relationship with the US needs to be rebuilt.
- All these relationships will need deft handling.
5. the relations with India
- Pakistan’s internal compulsions make a case for expanding the tactical thaw with India beyond the restoration of the LoC ceasefire in February 2021.
- Large segments of industry and traders in Pakistan have been calling for the restoration of bilateral trade.
- The ongoing suspension of trade hurts the Pakistani economy far more than it does India.
- However, the new government’s room for manoeuvre remains constrained by three factors.
- First, its internal preoccupations will leave it with little energy to devote to the complex India dossier.
- Second, the highly polarised political environment rules out the political consensus necessary to move forward constructively with India.
- And lastly, the government’s ability to deliver will remain contingent upon the will of the army.
Conclusion: The thinking of Army Chief Asim Munir on the India relationship is far from clear. The best we can do under the circumstances is to wait and watch how things pan out. However, should there be any constructive move by the incoming government, we should respond positively.