First quarter GDP data released by the Central Statistics Office on Tuesday were marked by the resilience of the services sector with a healthy 9.1% year-on-year expansion in financing, insurance, real estate and business services and an even stronger 12.8% growth in hotels, transport and telecom services.
Manufacturing did not fare badly either, thanks to recent months export surge, but analysts saw downside risk to the sector from a faltering US economy and the sovereign debt crisis in some European countries. Manufacturing output grew 7.2% in Q1 this year over the year-ago period, an improvement from the 5.5% growth reported in the fourth quarter of last fiscal, but significantly lower than 10.6% growth in the year-ago period.
On expected lines, mining output, bogged down by an absence of policy traction, grew a dismal 1.8% in the quarter, while the construction sector turned in an unpleasant surprise by reporting an output growth of just 1.2%.
Finance minister Pranab Mukherjee termed the GDP numbers no doubt disappointing, adding there was no room for complacency. Everyone, including the government, industry and the farming community, will have to work hard, he added.
Chief economic advisor Kaushik Basu said growth in the second (July-September) quarter is unlikely to be on the higher side, adding: But I do expect growth in third and fourth quarter of the year to do quite a substantial pick-up.
Said C Rangarajan, PMEAC chairman: The growth rate (in April-June) is in line with the target of 8.2% for the year as a whole... We believe that in the third and fourth quarters growth rate will be above 7.7%.
The heady 38% expansion in capital goods output in June allowed a somewhat reassuring 7.9% growth in real terms in gross fixed capital formation (GFCF) in Q1 this fiscal.
GFCF, seen as proxy of investment, grew just 0.4% in Q4 of last fiscal, causing many to conjecture that a sharp slowdown in investment might have begun. There is no conclusive evidence that investment growth is slowing down sharply, said DK Joshi, principal economist at Crisil.
Of course, private consumption growth slowed down to 6.3% in Q1 from 8% in the previous quarter. Government expenditure too witnessed a slowing, thanks to the withdrawal of more of the fiscal stimulus in the last Budget. Analysts at Goldman Sachs were not as sanguine as others. The firm said: The Q1 GDP data show a gradual slowdown across all sectors. Domestically, the economy has been experiencing a slowdown in interest-rate-sensitive sectors, worsened by rising input prices; also showing up as a decline in the PMI indices and passenger car sales. Given the aggressive hikes in policy rates by the central bank and the fact that on average, it takes two quarters for bank lending rates to transmit to investment activity, we expect the investment cycle to gradually bottom out by the end of (the current fiscal).
Shubhada Rao, chief economist at Yes Bank had a different take. Private consumption is continuing to do well, although the leverage part of consumption is moderating, she said. The overall growth figure is quite strong and positive, Rao said, adding that the investment number might, however, not be sustainable in the context of elevated input costs, rising interest rates and global uncertainties. Maintaining the growth in services was also a challenge.
Full impact of the rising interest rate cycle is yet to be felt in the economy, she said. Rao, however, added that 7.9% GDP growth for the current fiscal looked achievable.
Most analysts are of the view that with the 8.8% growth in industrial output in June, and the Q1 GDP figure which was more or less on expected lines, the RBI would continue with its tight monetary policy stance and hike the policy rate by another 25 basis points on September 16. This forecast is despite that fact a key central bank official was quoted recently as saying that global financial problems might amplify and slow down global growth markedly and impart a downward bias to the Indias growth projection.
The central bank has recently asserted that the immediate challenge to sustaining growth lay in combating the stubbornly inflation. Headline inflation stayed above 9% since December and was 9.22% in July. RBI on July 26 raised the repo rate, at which it lends to banks, by half a percentage point to 8%, and projected that inflation by the end of March would be 7%, a percentage point higher than its previous guidance. Indranil Pan, chief economist at Kotak Mahindra bank said: I think the RBI should stay on the course for tightening. For the year as a whole, I would still stick to our broad expectation for growth between at 7.3-7.5%. Crisils Joshi said the dip in mining output growth was cause for concern as it had indications for other sectors like power and steel too.
The outlook would be rather bleak for the coal sector where the policy imbroglio that persisted for long was yet to bite.
Tuesdays CSO data also said GDP growth in Q1 last year was revised to 8.8% from 9.3% in May data, thanks to new IIP (index of industrial production) series which led to revisions in manufacturing, mining, electricity and trade, hotels and restaurant sectors. GDP grew 7.8% in Q4 of last fiscal.