India’s economy grew a lower-than-expected 7% in the first quarter of the current fiscal compared with 7.5% in the previous quarter and 6.7% a year ago, the Central Statistics Office said on Monday, even as investment picked up a bit aided by the government and consumption was still to look up decisively. Analysts called the data unimpressive, but added that the government’s focus on investment spending coupled with a likely consumption surge from anticipated lowering of interest rates — HDFC Bank cut its base rate by 0.35% to 9.35%, effective Tuesday —could step up growth in the coming quarters.
In terms of real gross value added (GVA), the services sector continued to hold up, manufacturing almost sustained a momentum gathered lately and the farm sector did not do as badly as expected. Still, the GDP expansion was estimated at lower than the GVA growth of 7.1%, in what made analysts wonder why higher indirect tax collections and the reining in of subsidies haven’t boosted the headline growth figure. In Q4 of last year, the GVA growth of 6.1% was significantly below the GDP growth.
Official explanation for this was that at constant prices, annual growth in indirect tax collections remained rather muted.
The Centre’s fiscal data for April-July released on Monday revealed higher spending on fertiliser and food subsidies compared to the year-ago period, as the substantial arrears have been paid. That apart, the base effect too worked more beneficially for the GDP rather than GVA (the GVA grew 7.4% in Q1FY15 while the GDP expansion was 6.7%).
While government’s consumption expenditure grew just 1.2% in Q1 from a year ago (it fell 7.9% in Q4 of last year as expenditure was compressed to meet the deficit targets), analysts said a good part of government spending must have got reflected in fixed capital formation which grew a faster 4.9% in Q1 of this year compared wit 4.1% in Q4FY15.
Contribution of net exports to GDP has remained negative for several successive quarters now (exports fell 6.5% in Q1). The recent global developments like the troubles faced by the Chinese economy and the devaluation of yuan could mean that the export sector might take time to rebound. The sector, pertinently, has increased relevance to India’s GDP now thanks to the jump in foreign trade in recent years.
Agriculture grew 1.9% in Q1 compared with 2.6% in the year-ago period, which analysts said exceeded expectations but added that the kharif crop hasn’t practically been factored in this and so the jury is still out on whether the less-than-satisfactory monsoon would take a toll this year’s crop.
Mining and construction sectors too fared rather satisfactorily in Q1 with growth rates of 4% and 6.9% respectively.
“Agriculture and mining were the big surprise this time, while government spending was not as per expectations,” said Indranil Pan, group chief economist at IDFC Ltd.
Given that the economic expansion came on a relatively favourable base (GDP grew just 6.7% in Q1, 2014-15), the government’s projection of achieving a growth rate in the range of 8-8.5% this fiscal seems ambitious, especially many high-frequency indicators –credit growth, auto sales, exports, imports– paint a far-from-encouraging picture.
The lower-than-expected growth rate could also make it tougher for the government to persuade global rating agencies for an upgrade of the county’s sovereign rating. In fact, the finance ministry made a pitch to Standard & Poor’s on Monday to this effect, citing better fiscal health and lower inflation. Having exceeded China’s growth rate in the January-March period, India’s economic expansion in the June quarter remained the same as China’s, at 7%.
Barring construction and trade, hotel, transportation, communications and services related to broadcasting, all other sector, including financial services, witnessed a slowdown in the GVA from a year before (See charts). Even the sectors that are more amenable to government policies such as manufacturing and services had done worse than a year earlier, while agriculture, vulnerable to the monsoon, and exports, susceptible to global demand and prices, continued to see slowdown.
The data marks a reversal of the moderation in the GVA growth recorded in recent quarters–from 8.4% in Q2FY15 to 6.8% in Q3FY15 and further to 6.1% in Q4FY15. “While overall GVA growth has improved substantially in sequential quarters, growth of GVA excluding agriculture recorded a smaller uptick from 7.8% in Q4 of FY15 to 8.0% in the June quarter,” said Aditi Nayar, senior economist at ICRA. “The 6.9% growth recorded by the construction sector in April-June 2015 is surprisingly strong, given the above-average rainfall in these months, which was expected to have curtailed construction activity,” she added.
While the government expects the farm and allied sector to grow much faster than last year in the current fiscal, thanks to a favourable base (the sector grew just 0.2% in 2014-15), the slowdown in the monsoon intensity since July pose some serious risks to summer-sown crops. As such, the first quarter growth in agriculture and allied sector slowed to 1.9%, against 2.6% a year earlier.
Moreover, industrial production grew just 3.2% in the April-June period, compared with 4.5% a year before. Non-food credit growth remained in the range of 7.7-9% in the first quarter, compared with that of 13-14.2% a year before, reflecting lack-lustre investment scenario amid soaring bad loans.
“The dismal electricity sector performance pulled down industrial growth to 6.5% in the first quarter from 7.7%. GDP growth this year will be led by consumption growth (backed by falling inflation and monetary easing), investment growth revival will take place once capacity utilisation starts increasing. Weak global demand also attributed to lower growth in first quarter,” said Devendra Kumar Pant, chief economist, India Ratings & Research.
Since the government will allow the ordinance on its land acquisition Bill expire and with the Opposition posing stiff resistance to the passage of the GST Bill, the much-needed reforms space is severely squeezed now.