India’s Q4 GDP has grown at a stellar 7.9% versus 7.2% in Q3 of FY16, but experts are of the opinion that it is still early for Prime Minister Narendra Modi-led NDA government to rejoice. The Indian economy grew at 7.6 per cent for fiscal year ended March 2016, which is in line with the advance estimates by CSO (Central Statistics Office).
Will the high GDP growth sustain in the coming quarters? With 7.9% growth, India has managed to retain its tag of being the world’s fastest growing economy, yet challenges remain and economists see a gradual but slow recovery ahead.
Says Anubhuti Sahay, Head, South Asia Economic Research (India) at Standard Chartered Bank, “The GDP growth for FY16 is in line with what the CSO had forecast for the entire year. What worries us is that despite efforts by the government to step up public sector investment, the real investment has slowed down as compared to FY15. This is a little un-comforting.” “The data suggests that the key driver of economic growth was consumption expenditure, whose growth is much higher than anticipated (7.4% versus 6.2%). This is despite the fact the rural consumption would have remained weak. While consumption expenditure is expected to be a big growth driver for FY17 (given 7th Pay Commission hike and expected good monsoon), the fact that it was such a big contributor of growth in FY16 is surprising to say the least,” Sahay tells FE Online.
“I would like to point out the more reliable number seems to be the GVA (Gross Value Added) estimates, where the number has grown marginally to 7.2%. This seems to be a better indicator of economic activity and ties with other economic data points,” she feels.
Agrees DK Srivastava, Chief Policy Advisor at EY India, who cautions that it is early to cheer on the growth front. “The GDP data for the entire year is in line with estimates, but the fourth quarter has traditionally been good for the Indian economy. The good news is that trade, transport and communications sectors have grown well, but on the worrying side growth in construction and agriculture is not that great.”
Srivastava goes on to tell FE Online, “On the demand side, investment expenditure continues to be low and exports are showing negative growth. Additionally, the GDP estimation methodology tends to overestimate manufacturing and services. So in that sense, I believe it is too early to cheer.” “All these concerns not withstanding, 7.9% GDP growth for Q4 is a robust number,” he adds.
Devendra Kumar Pant, Chief Economist at India Ratings and Research is also concerned about the investment demand. Pant tells Reuters, “The consumption story is there because despite two consecutive sub-par monsoons and rural demand not growing we are seeing some growth, but right now the problem more is of investment. We all believe investment demand is going to revive quickly, but it will not revive very soon. Until and unless investment story evolves, the stability to growth will be a challenge.”
Private final consumption expenditure (PFCE) witnessed a second straight quarter of expansion at 8.3%, compared with 8.2% in the December quarter, despite rural distress.
Gross fixed capital formation (GFCF) contracted 1.9% in the March quarter, falling from as high as 9.7% in the September quarter, while export contraction continues, with potential to slow down manufacturing. The fall in GFCF was despite government trying to spend more to boost growth.
What will drive growth in this fiscal? Srivastava of EY India sees agriculture as key to recovery. “If agricultural growth picks up due to the good monsoon that has been forecast, the Indian economy can grow in the range of 7.6% to 7.7% in FY17,” he says.
Pant of India Ratings and Research concurs, “Agriculture, no doubt, will have some positive impact from the third quarter onward. Agriculture will be driving it on the expectation of better rainfall after two consecutive years of sub-par monsoon. That will revive demand both in industry as well as services.”
Sahay of Standard Chartered concludes, “To sum up the GDP growth numbers, I would say that the Indian economy is on the path to recovery, but the recovery is extremely gradual and will continue to be so.”