1. India’s Q1 GDP growth slows drastically to 7.1%, but heavens haven’t fallen yet. Here’s why

India’s Q1 GDP growth slows drastically to 7.1%, but heavens haven’t fallen yet. Here’s why

India's GDP (Gross Domestic Product) growth slowed down to a disappointing 7.1% in the first quarter of FY17, the weakest in the last five quarters.

By: | New Delhi | Published: August 31, 2016 7:38 PM
With the effect of good monsoon and 7th Pay Commission hike expected to boost things in the current and coming quarters, GDP growth is expected to pick up. (Reuters)

With the effect of good monsoon and 7th Pay Commission hike expected to boost things in the current and coming quarters, GDP growth is expected to pick up. (Reuters)

India’s GDP (Gross Domestic Product) growth slowed down to a disappointing 7.1% in the first quarter of FY17, the weakest in the last five quarters. Growth has been dragged down by a contraction in mining and a sluggish farm sector. The numbers seem particularly gloomy after the robust growth rate of 7.9% in the last quarter, and there is little doubt that they are way below what most analysts were expecting. Some economists that Reuters spoke to said that the dream of clocking 8% growth in the current financial year seems distant now. What seems to have caught the attention of most experts is the fact that private consumption continues to be slow.

However, overall it is still too early to worry, feel economists. With the effect of good monsoon and 7th Pay Commission hike expected to boost things in the current and coming quarters, GDP growth is expected to pick up. Says Shubhada Rao, Group President and Chief Economist at Yes Bank, “Admittedly there are worries on the investment front, however, if you were to ask me if the number is trendsetting, I would say it’s early to worry on that front.” Rao told FE Online, “The Q1 GVA (Gross Value Added) number has been disappointing vis-a-vis our expectation led by significant negative surprise in mining. Construction too has come in lower than our expectation. Q1 GVA has largely been supported by government consumption. The growth momentum has decelerated and the worrying part arises from investment data.”

Rao noted that while private capex was widely expected to drag, the government capex too has been seen slowing in the first quarter. Going forward she expects private consumption to lend support to growth on the back of good monsoon and the 7th pay commission payout. “The growth in FY17 will be consumption led. We continue to expect one rate cut of 25 bps in Q3 of FY17,” she said.

Sahil Kapoor, Chief Market Strategist at Edelweiss Securities feels that while the GDP data may have come in below expectations, it’s still “quite a strong number”. “See, the headline number is still quite strong. Any number above 7% means that the economy is growing well. The data is quite comparable to growth rates in the last decade. I don’t think there is any immediate need to worry,” Kapoor told FE Online.

“If you look closely at the numbers, then private consumption continues to be slow. The mining sector has seen a contraction, but that is driven by the global cycle. What needs to be noted is that rate of GFCF (gross fixed capital formation) has declined to 29.6% from 32.7%, that to me is a little worrying,” he said. However, Kapoor sees consumption revival leading the economic recovery, particularly with the 7th Pay Commission dole out and a good monsoon. “I think the GDP number will pick up significantly in the current quarter itself and will cross levels of 7.5%,” he said expressing confidence.

Abhishek Upadhyay, Economist at ICICI Securities Primary Dealership told Reuters, “Growth continues to be driven by government spending while private spending remains muted, which is a worry.” “Agriculture growth came weak this time but good monsoon is expected to boost overall growth in the second half. We continue to expect GDP to grow at 7.7-7.8% for the full fiscal year ending in March and GVA growth of 7.6%,” he said.

There are a lot of problems that still plague economic growth, particularly on the lackluster private investment front, and the recovery path is bound to be slow. However, India still managed to retain its tag of the world’s fastest-growing large economy, ahead of China, and indications are that growth will pick up going forward.

  1. K
    Kannan
    Aug 31, 2016 at 4:21 pm
    India's Growth is significantly lower than expected. It might be true that we are better off than some other markets but we cannot lose sight of the fact that Good Quality FDI and Domestic Consumption is yet to happen to fuel sustainable growth.Hot Money has flowed in abundance into the stock market. The new highs are unsustainable and a sight of a bubble could emerge if the growth over the next quarter is also slow. JOB Growth is below par.We already have the 2016 Harshad Mehtas and Ketak Parekhs making statements such as the 'irrelevance of the P/E' or the Indian economy being the 'Turnaround scrip'. History Repeats !!
    Reply

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