India’s economic growth is seen at 7.6% for the current fiscal, the highest since the current methodology was adopted to compute national income and compared with 7.2% a year before, according to the advance estimate released by the Central Statistics Office on Monday, although gross domestic product (GDP) expanded at a slower pace of 7.3% in the October-December period against a revised 7.7% in the previous quarter.
Analysts, however, termed the advance estimate “ambitious,” saying the required growth in the fourth quarter to realise this projection is as high as 7.9%, which looks difficult, especially when other high-frequency indicators, including a 13th straight month of export contraction, subdued manufacturing activity, auto sales and consumer goods output don’t suggest a high-growth trajectory.
The government said the better-than-expected headline growth figures were the result of the reforms undertaken by it, and added that, going forward, things could look better as investment intentions would translate into activities on the ground.
What also surprised the analysts was the advance estimate of a 7.6% expansion in private final consumption expenditure for 2015-16. This means the PFCE is required to grow some 12% in the last quarter to reach the projection, as it has risen only 6.1% in the April-December period from a year before.
“Given that GDP data for Q3 is released with a shorter time lag than in other quarters, the quarterly results are available for a curtailed sample of listed entities, which opens up the possibility for subsequent revisions,” said Aditi Nayar, senior economist at ICRA. With the pick-up in average CPI inflation and narrower year-on-year contraction in the WPI in the third quarter versus Q2, the GDP and gross value added (GVA) deflators were positive in the just-concluded quarter, Nayar added.
However, there were some pleasant surprises for policymakers in the projections, too. Nominal GDP, which has grown 8.1% in the first three quarters, is estimated to expand 8.6% in the current fiscal. The mid-year review had put the nominal GDP growth at 8.2% for 2015-16, against the budgeted 11.5%. A higher nominal GDP growth will help the government in its attempt to adhere to the fiscal deficit target of 3.9% of GDP for the current fiscal, especially when there is a public debate on raising government spend to boost the economy.
The fact that the country witnessed a second straight year of drought in 2015, and the rabi harvest is unlikely to be a bumper one, means farm and allied sector growth is expected to contract 1% in the current fiscal, even on a 2.4% contraction a year before. This means rural private demand is unlikely to rise significantly any time soon.
Despite the robust expansion in the government’s capital expenditure, growth of gross fixed capital formation slowed considerably to a five-quarter low of 2.8% in the third quarter, highlighting the muted trend in private sector investments. Private consumption expenditure remained the key engine of growth in the December quarter despite the sluggish rural sentiment.
The GDP growth in the first three quarters of this fiscal now stands at 7.6%, 7.7% and 7.3%, respectively. The growth rate for the April-June quarter was revised sharply upward from a provisional 7% to to 7.7%, which has driven up the projections for the entire 2015-16 fiscal. Despite a slowdown in the third quarter, India’s economic growth still outpaced China’s 6.8% for the same period.
However, even in the data for the third quarter, the analysts questioned a 12.6% spurt in the GVA in manufacturing for the third quarter and much higher than the IIP for manufacturing for the period, despite the floods in a major commercial centre like Chennai in late November and early December.
Net exports growth is seen -6.3% in FY16 against 0.8% last year, persisting with the trend of negative contribution to GDP from foreign trade. With the gap of 0.2 percentage point between GVA and GDP estimates of Q3, government sources said the manner in which tax revenue was accounted by the finance ministry also determined this differential and the problem could be technically more challenging for the last quarter, when subsidy outgo could be substantially higher than Q3.
While commodity price deflation is hitting metal companies and upstream oil producers, firms making value-added items have improved margins as their input costs have fallen sharper than output costs, says the government. However, independent analysts say that the CSO’s GVA growth numbers still lacked full credence.
“Even with the kind of margins and profits which we are looking at in the corporate sector, the GVA number seems to be a little elevated,” said Abheek Barua, chief economist at HDFC Bank. However, there is a different take too. “Initial numbers seem to suggest that growth is stronger than earlier thought, but the GVA number, which is a more important number, is not throwing big surprises as per our estimates,” said Saugata Bhattacharya, chief economist at Axis Bank. “Inventory growth has come down to 5.5% from 20.3% last year. That means there’s been a massive drawdown in stock, which means there’s still good demand in the economy,” he said.