Low base, manufacturing, agriculture help, key services like banking, telecom slow down.
Aided by a favourable base but also a pick-up in manufacturing, construction, activities allied to agriculture and an uptick in both rural and urban consumption, India’s economic growth accelerated to 8.2% in June quarter (Q1FY19), the Central Statistics Office (CSO) said on Friday. While the low base is seen to have added close to 50 basis points to the nine-quarter-high growth rate, it was still higher than “trend growth” even without that benefit, analysts reckoned.
The latest economic data could give the Narendra Modi government some ammunition to weather the Opposition’s criticism of delivering growth lower than United Progressive Alliance’s. A good show by labour-intensive sectors would also come in handy for the government, struggling to present a credible picture of job creation.
Although investments, for long in the doldrums, are showing some signs of recovery, a critical part of it appears to be public expenditure-driven. A capacity overhang still hampers private-sector investments. Gross fixed capital formation, a close proxy of investments, was 31.6% of gross domestic product (GDP) in Q1FY19, not much higher than 31% in the year-ago quarter.
Economic affairs secretary SC Garg said the “robust (Q1) performance has given us the confidence that the FY19 growth could be even higher than 7.5%” (the upper end of range forecast by the last Economic Survey).
The Reserve Bank of India has projected the growth at 7.4%. Garg said a bottoming out was clearly happening in Q1FY18, when the GDP grew at 5.6%.
However, economists have warned that without significant traction from private investments, over 8% growth won’t be sustainable. Investment proposals in April-June 2018 were lower at Rs 1.33 lakh crore compared with Rs 1.7 lakh crore in the year-ago quarter. Also, the favourable base effect will begin to wear off after the second quarter of this fiscal. A tightening of the interest rate cycle that many feared could constrain growth, however, appears less likely now, with the retail inflation falling significantly to 4.2% in July.
As for private consumption, the principal engine of the economy, there has been steady pick-up over the last three quarters (private consumption expenditure increased its share in GDP marginally from 54.7% in Q1FY18 to 54.9% in Q1FY19). Pay commission/HRA revisions at the state level is seen to be providing a transitory boost to consumption demand.
However, the limits of the government’s ability to boost consumption is increasingly becoming visible. With this year’s fiscal deficit target of 3.3% of GDP appearing difficult, the Centre’s total expenditure and revenue expenditure grew 8.7% and 6.6% in Q1FY19 versus 27.1% and 25.8% in the year-ago quarter. As a share of GDP, government final consumption expenditure, however, remained at 11.8% in both these quarters.
From the supply side, higher gross value added (GVA) growth at 8% was driven by a 13.5% manufacturing sector growth, although on a weak base of -1.8%, an 8.7% growth in construction and over 5% growth in agriculture. Except “public administration, defence and other services”, other major services like “financial services” and “trade, hotels, communications etc” reported growth rates lower than 7%. The stress in profitability of telecom companies and non-performing asset-burdened banks are hitting the GDP growth.
According to Pronab Sen, former chairman with the National Statistical Commission, the impressive farm sector growth of 5.3%, which is a five-quarter high, is puzzling. This is because it is driven mostly by the 8.1% growth witnessed in allied sectors. There are hardly any solid data on these sectors, which accounted for close to 45% of GDP in the overall farm and allied sectors. Also, while the deflator for calculating real growth in the farm and allied sectors was just 1.6%, it was as high as around 7% for the non-farm sector. This means non-farm prices rose at a much faster pace than farm prices in the first quarter, so farmers’ income continue to remain depressed, Sen argued.
Analysts said the impact of net exports worsened further, which shaved 3.4 percentage points off the headline growth rate in the first quarter of this fiscal, against 1.4% in the previous quarter. With the rupee weakening (which could inflate the import bill) and global oil prices rising, some analysts fear the impact of net exports on GDP could aggravate further in the September quarter. Already, merchandise trade deficit (at current prices) touched a 62-month high in July.
Shubhada Rao, chief economist at Yes Bank, said, “Given that we don’t see a runway concern on inflation even after accounting for the rupee depreciation, we don’t expect the RBI to raise rates now. We expect the last two rate hikes (by the monetary policy committee in the past two policy review meetings) to play out on growth and inflation in the next two quarters and inflation to have only a moderate upside.”
“Despite the out-turn of the monsoon so far, agricultural growth may ease in the quarters ahead, given the high base of the last kharif and rabi harvests,” said Aditi Nayar, principal economist at Icra. The 9.5% growth in the output of capital goods, which benefited from a low base, and the healthy 27.3% expansion in the government’s capital spending in Q1FY19, supported the gross fixed capital formation growth in that quarter, she added.
Manufacturing, construction and public administration were the three fastest growing sectors in the first quarter. While the former two sectors benefited from a favourable base effect, which would diminish going forward, the extent to which government expenditure can prop up growth in the remaining quarters of FY19 without contributing to a fiscal slippage, would take a cue from revenue buoyancy.