India’s economic growth plunged to a 13-quarter low of 5.7% in the April-June quarter this fiscal, as the demonetisation-hit manufacturing sector received a further debilitating blow from pre-goods and services tax de-stocking by jittery businesses. The growth figure came in lower than expected also because of a relatively high base (7.9%) of the same quarter last year, a higher deflator and a 45% annual jump in central government subsidies.
However, apart from these statistical factors, the Central Statistics Office’s data also confirmed the short-term concerns to growth highlighted in the recent volume of the Economic Survey — a slackening of aggregate demand that set in from the first quarter of last year only tends to exacerbate — and exposed the limits of sustaining an almost solely consumption-led growth.
While the survey had virtually cut the 2017-18 growth forecast to the lower end of a previously announced range of 6.75-7.5%, most non-government analysts now see the rate of the country’s economic expansion in the current fiscal year at 6.5% or thereabouts. The slowdown, unless corrected soon, threatens to strip India of its fastest-growing major economy status. For a second straight quarter, China’s growth has outpaced India’s. The world’s second-largest economy grew 6.9% in both January-March and April-June quarters. While the Reserve Bank of India said that without the pay panel award and one rank, one pay scheme for defence services, last year’s real GDP growth would have been a huge 2 percentage points lower than the 7.1% clocked, not everyone — and certainly not the chief economic adviser — would endorse its stance on policy rates, which is at least one of the key factors for the falling away of fixed investment.
Stating that slowing of the economy was predominantly due to the pre-GST de-stocking and consequent decline in production, finance minister Arun Jaitley said, “Hopefully, with the operationalisation of GST, the slowdown in manufacturing would be bottoming out.” Unlike in earlier quarters, manufacturing GDP grew lower than the index of industrial production for manufacturing (1.2% versus 1.8%) in Q1FY18. Valuables, unusually, jumped more than three times to Rs 1.06 lakh crore in the first quarter, thanks to a massive 247% rise in gold imports from April to June as jewellers stepped up purchases fearing a high GST rate.
Rampant sales by wholesalers and retailers prior to GST, however, had a salutary impact on some services, especially “trade, hotels etc”, which grew a robust 11.1% in Q1FY18 against 6.5% in the previous quarter and 8.9% in the year-ago period. Although the overall gross value added (GVA) in Q1 grew at the same pace as in the previous quarter, the rate of GDP expansion hasn’t kept pace (the GDP-GVA gap narrowed from 50 basis points in Q4 FY17 to just 10 basis points in Q1FY18).
The government’s subsidy outgo in food, fuel and fertiliser shot up to Rs 1.37 lakh crore in the first quarter from Rs 93,500 crore a year earlier. Even in the first quarter of FY17, the gap in growth rates between GDP and GVA was 30 basis points, lower than the 50 basis points in the previous quarter.
A “normalisation” of wholesale price inflation to 2.32% in Q1FY18, compared with 2.32% a year earlier, also drove up the deflator for the calculation of real growth. Private final consumption expenditure, the economy’s principal engine, has also shown a slowing of growth since the third quarter of last year. Government consumption, unusually strong throughout last year but extremely vigorous in the last quarter that saw the note-swap exercise hitting the economy, held up in Q1FY18 too. Conventionally, in the first quarter of a year, government expenditure tends to be subdued but thanks to
Conventionally, in the first quarter of a year, government expenditure tends to be subdued but thanks to early budget presentation, the Centre’s spending started briskly this year — 38% of the Centre’s budgeted expenditure for FY18 was spent in April-June. The growth in government final consumption expenditure in Q1FY18 was 17.2% compared with 16.6% in the year-ago quarter. The question is if this could be sustained to offset the almost secular decline in gross fixed capital formation (GFCF). While the encouraging GST receipts are a good indicator for the fisc, as the economic survey pointed out, farm loan waivers could potentially reduce aggregate demand by 0.7% of GDP, as fiscally constrained state governments might cut development expenditure.
The GFCF has ceded its share in GDP from 31.2% in the first quarter of FY16 to just 28.5% in the final quarter of FY17, although it improved slightly to 29.8% in Q1FY18. For the first time in the new GDP series, GFCF had contracted in Q4FY17 — it was 2.1% less than in the year-ago quarter — but it grew 1.6% in Q1. Last fiscal year, the GFCF contributed barely 0.7 percentage point to the real GDP growth of 7.1% despite accounting for around a third of real GDP. Although Jaitley said private investments were now to pick up, analysts doubted the immediate prospect of the same as new investment intentions contracted in FY17 in both the government and private sectors.
According to Radhika Rao, group economist at DBS, Singapore, the pick-up in consumption was more moderate than anticipated, suggesting spending was not materially front-loaded ahead of the GST launch. “Private sector investments and manufacturing activity, weighed by low inventories and higher input costs, continue to be the weakest links in the growth story… These trends will prompt a downward revision in the RBI’s GVA estimates, but we don’t expect a knee jerk shift to an easing bias.” Nevertheless, as Abheek Barua, chief economist with HDFC Bank, points out: “A rate cut from RBI now becomes more and more probable, not immediately, but over the next six months.”
Estimating that the current rates are 25-75 basis points above the so-called neutral rate, the Economic Survey had suggested there was enough room for the the central bank to cut rates. Aditi Nayar, principal economist with Icra, said: “Restocking post-GST and a favourable base effect are likely to contribute to higher GDP and GVA growth in the remaining quarters of FY18.” However, chances of growth surpassing 7% for 2017-18 as a whole have diminished after the slowdown in Q1.Chief statistician TCA Anant said that as companies took to GST, inventory has returned to normal levels which will help revive growth.