Private investment, govt consumption drive growth to 7-quarter high; Centre plays down oil shock in FY19
India’s gross domestic product (GDP) grew at 7.7% in the final quarter of the last financial year (Q4FY18),
the fastest pace in seven quarters, aided by the gradual broad-basing of a recovery in private investments and a sustained push from government expenditure, especially of the consumption variety. According to data released by the Central Statistics Office (CSO) on Thursday, the Q4FY18 GDP expansion that came on a 6.1% growth in the year-ago quarter was much higher than (a revised) 7% in the previous quarter (Q3FY18).
However, the last fiscal still witnessed the lowest economic growth under the National Democratic Alliance government’s watch, as the first two quarters of the year, along with the last quarter of FY17, saw the adverse impacts of demonetisation and the goods and services tax’s transition blues, both of which have since faded. Among individual sectors, manufacturing and construction did well in the March quarter with year-on-year growth rates of 9.1% and 11.5% respectively, although the latter’s performance was on a weak base (-3.9%).
In what indicated sustained government consumption, “public administration, defence and other services” grew spectacularly at 13.3% on a robust base of 16.4% growth. Growth increased 70 basis points sequentially in each of the three quarters to Q4. An unusual rolling back of the subsidies — as per Controller General of Accounts (CGA) data released separately, the Centre’s expenditure on subsidies in FY18 was Rs 23,735 crore lower than the figures released for April-December 2018 period, indicating the sum was returned to the exchequer by the agencies concerned — also made the GDP figure look rosier. The gross value added (GVA), the CSO said, grew 7.6% in Q4FY18.
While analysts are wary of the rising crude prices hitting India’s growth in FY19 (Moody’s had on Wednesday trimmed its India growth forecast to 7.3% for calendar year 2018 from a previous projection of 7.5%, citing higher oil prices and tighter financial conditions),economic affairs secretary Subhash Chandra Garg said that there wasn’t any direct correlation between oil prices and the country’s economic growth. Based on the current indicators, he said, the country could “maintain (Q4FY18) kind of growth level in FY19”.
FY18 saw heightened investment activity in a slew of sectors — infrastructure segments like ports, national highways and railways topped the list. Relative to GDP, gross fixed capital formation (GFCF) increased marginally to 31.4% in FY18 from 31.1% in the previous year. Quarter-wise data indicate that investments have indeed picked up in Q3 and Q4 of last fiscal. From 30.8% of GDP in Q2FY18, GFCF grew to 31.6% of GDP in Q3 and 32.2% in Q4. That this pick-up was driven by private investments as well is evident from the fact that the Centre’s budgetary capex stood at just Rs 27,108 crore in Q4FY18 against nearly Rs 1 lakh crore in Q4FY17.
Of course, CPSEs and other government entities have kept up the investment momentum and offset the compression in budgetary capex. Higher growth and rising retail inflation (it rose 30 basis points sequentially in April to 4.58%) may prompt the central bank to turn more hawkish and the monetary policy panel may go for a rate hike by August, some analysts said.
Garg said decent credit growth and improving capacity utilisation indicate an investment recovery. The rupee’s slide in recent months will be contained, with even foreign portfolio investors returning in the past three to four days, he added. Interim finance minister Piyush Goyal said the Q4 growth shows “the economy is on the right track and set for even higher growth in future”.
Since a pick-up in oil and other commodity prices inflated India’s import bill, negative net exports again weighed on the pace of economic growth. Net exports dragged down growth by a substantial 150 basis points in the last fiscal, while they had, unusually, raised the GDP expansion by 10 basis points in 2016-17.
Another worrisome aspect is the slowing of private consumption, the main growth engine. The share of private consumption expenditure in GDP was lower at 54.6% in Q4 against 59.3% in the previous quarter. Pronab Sen, former chairman of the National Statistical Commission, told FE that while the Q4 growth is better than expected, on an annual basis government consumption has been the prime driver. Given the limited ability of the government to spur growth without breaching the reduced fiscal deficit target of 3.3% for 2018-19, private consumption and investment have to pick up higher than the headline GDP growth rate this fiscal for this momentum to sustain, he said.
According to Aditi Nayar, principal economist with Icra, growth will consolidate above 7% in the current fiscal on the back of the continued benefits of the implementation of GST, healthy consumption demand, government expenditure, and a back-ended pick-up in investment activity. “However, the ability of public sector banks to support lending growth, the risk of monetary tightening and trade wars, and the impact of higher crude oil prices on purchasing power of consumers and corporate earnings have emerged as risks,” she said. Robust rabi harvest propped up agriculture growth to 4.5% in Q4 against 3.1% in the previous quarter, despite an unfavourable base.