Ends 5-quarter decline; post-GST restocking, manufacturing rebound help, investment looks up.
Reversing a trend of declining growth in five successive quarters earlier that put the Narendra Modi government in a spot, India’s economy posted 6.3% growth in July-September quarter (Q2) of the current financial year. Gross domestic product (GDP) on a real basis had grown at a 13-quarter low of 5.7% in the previous quarter and 7.5% in Q2FY17. Among the aggregate drivers of growth, the principal one, private consumption, continued its tendency of losing GDP share that commenced in Q4FY16 in Q2FY18 as well and “net exports”, despite a very modest year-on-year increase, still had a negative effect on growth. Investment, disconcertingly laggardly over the last few years, showed a marginal uptick. While finance minister Arun Jaitley took heart from the growth trajectory reversal being enabled by a 7% annual expansion in manufacturing and 4.7% growth in gross fixed capital formation (investment), the restocking following the roll-out of the goods and services tax (GST) contributed in some measure to the former and some of the sheen of the acceleration in investment would be off as it was skewed towards investments in valuables that have little bearing on the economy’s productive capacity. Despite the latest rise in India’s growth, China’s GDP expansion has outpaced India’s for a third straight quarter.
The world’s second-largest economy grew 6.8% in the July-September quarter. After the release of the Q2FY18 GDP data by the Central Statistics Office (CSO), chief statistician TCA Anant said Q2 indirect taxes might have been higher than estimated owing to GST-related uncertainties over industries’ tax liabilities and could probably be revised later. Higher taxes would inflate the GDP, which is gross value added (GVA) plus indirect taxes minus subsidies. However, while a higher subsidy outgo (up an annual 45%) had dampened the Q1FY18 figure, it hasn’t hit the GDP as much in Q2, when annual subsidy growth was just 18.4%., the GST regime posed some “statistical challenges” leading to a conservative estimate of growth in retail trade, which was earlier based on collections of sales tax, an impost now subsumed by the GST.
While a withering of the unfavourable base effect will aid the GDP growth in the second half of 2017-18 — most analysts now peg the annual expansion in the range of 6.3-6.5% — key questions are how fast exporters can add value to the economy by exploiting the world economy that is on an upward trajectory and whether public spending can give the economy solid support during the period. Already, the growth of government final consumption expenditure has declined from a strong 32% in Q4FY17 to 17% in Q1FY18 and further to 4.1% in Q2DY18. By the fiscal deficit target of 3.2% of GDP, the Centre hasn’t got the capacity to keep the budget capex pace while it might still push PSUs and other state-run bodies like NHAI to accelerate investments. In fact, budget capex in October 2017 was around `16,000 crore, down from a monthly average of over `24,000 crore in the first half of the fiscal year.
Nominal GDP growth improved only a tad to 9.4% in Q2, against 9.3% in the previous quarter. This means no relief is forthcoming for the government on meeting the fiscal deficit target of 3.2% of nominal GDP for FY18. Among sectors, “farm and allied sectors” grew 1.7% in the July-September quarter compared with 2.3% in Q1 (robust foodgrain production is not reflected much in growth as it came on last year’s record output) while “mining and quarrying” recovered from -0.7% in Q1 to 5.5% in Q2. Construction, which was hit heavily by demonetisation, is still in a shambles: The sector grew 2.6% in Q2 as against 2% in the previous quarter. “Trade, hotels, etc” and financial services are holding up, reporting Q2 growth figures of 9.9% and 5.7%, respectively.
Analysts pointed out that the latest growth figure is in line with the Reserve Bank of India’s recent assessment and shouldn’t move the needle on interest rates. “We expect RBI to remain on pause in December and February, given upside risks to inflation as well as the fiscal deficit, exacerbated by rising oil prices and a gradually tightening global rates environment,” Sumedh Deorukhkar, senior economist at BBVA, Hong Kong, wrote. Some analysts expect next week’s monetary policy commentary to be more hawkish. In what indicated consumers’ wariness, the share of private final consumption expenditure in GDP fell from 56.6% in Q4FY16 to 54% in Q1FY18 and 53.9% in Q2F18. Although gross fixed capital formation expanded at 4.7% ion Q2FY18 compared with 1.6% in Q1FY18 and -2.1% in Q4FY17, this wasn’t sufficient to enhance its share in GDP, which declined from 30.2% in the first half 2016-17 to 29.4% in the corresponding period of the current year.
Anant said the CSO’s indirect tax estimate for Q2 could not be “stated to be complete” given the difficulty faced by businesses in assessing their tax liability on account of the GST disruptions. As the government gave the industry considerable latitude, taxpayers might have deferred payments. “Inventory accumulation (post-GST restocking) doesn’t appear to be a major a source of value-addition (in Q2),” Anant said, adding that effect of the accumulation might persist in Q3 as well. The GDP deflator eased to 3.2% in Q2 from 3.5% in Q1, while the GVA deflator rose to 2.5% in Q2 from 2.3% in the previous quarter. Net exports grew just 1.2% in Q2, despite the fact that the global trade is now projected by the World Trade Organisation to grow 3.6% in 2017, up from 2.4% forecast in April and only 1.6% recorded in 2016. However, analysts said the pick-up in manufacturing in Q2, which was hit by pre-GST stock clearance in Q1, signals bright export prospects in the coming quarters.
The farm sector will continue to be a drag on overall growth this fiscal, thanks to lingering disadvantage from an unfavourable base following a record harvest last year. The farm sector grew just 1.7% in Q2, because the corresponding quarter last year witnessed a decent 4.1% expansion. Valuables more than doubled to Rs 75,408 crore in Q2 from a year earlier, thanks primarily to a jump in gold imports ahead of the festival season. In Q1 though, valuables had jumped an unusual three times to Rs 1.06 lakh crore due a 247% surge in gold imports. Aditi Nayar, principal economist at Icra, said a back-ended pick-up in spending by states and a favourable base effect could contribute to higher growth in gross value added in the second half of this fiscal than the first half. “However, the unfavourable advance estimates of kharif output of most crops, as well as the impact of higher fuel prices on earnings, are likely to temper the improvement in GVA growth in Q3 FY2018,” she said.