Data released by the CSO show lower-than-expected growth of GDP, at 7.1% in the first quarter of the fiscal year. This is the lowest expansion in six quarters. The GDP had grown 7.9% in the previous quarter and 7.5% in Q1FY16. As per Reuters, even with lower-than-expected growth, India remains the fastest growing major economy, with China registering 6.7% growth during June quarter.
Gross value added (GVA)—another measure of economic activity—show the economy growing at 7.3% in June quarter. This is higher than the GDP growth rate. GDP growth is arrived at by adding net indirect taxes (indirect taxes minus subsidies) to GVA. Hence, the reason for lower GDP growth can be attributed to higher subsidy expenditure. Drawing on the same logic, Economic Affairs Secretary Shaktikanta Das said, “Last year, we achieved 7.6% growth on the back of failure of two monsoons. This year, the monsoon rains have been good. Agricultural production is expected to be much better than the previous two years and definitely agriculture will contribute significantly to GDP. Besides, the Budget has been very well received by various sectors of the economy. A large number of structural reform measures have been taken by the government over two years, which are now beginning to be felt. All things put together, we are hoping to better last year’s growth rate and perhaps get closer to 8%.”
Gross fixed capital formation (GFCF)—a proxy for investment demand in the economy—continued to signal no pick-up in the private investment activity. It has contracted to a dip of 1.9% during March quarter. This dip in investment is despite government pushing public investment. This can be attributed to excess capacity in private sector and high level of debt in sectors such as construction, infrastructure.
Though the government was incentivising private investments over few months, the fall in GFCF has been steep. According to CSO, GFCF growth fell from 9.7% in Q1FY16 to 1.2% in Q3FY16.
The sectoral trend for year-on-year growth reveals that growth is coming from a few parts of economy and a comprehensive mix is yet to be achieved. Mining dipped into negative territory (-0.4%) and construction disappointed (1.5%). During the same quarter last year, these sectors grew 8.5% and 4.5%, respectively. Manufacturing (9.1%) and electricity (9.4%), however, performed better than they did during the same quarter a year ago, when they grew at 7.3% and 4%, respectively. Agriculture and services more or less managed to stay in the positive zone. Agriculture slowed down to 1.8% in June quarter from 2.6% during the same quarter a year ago. Services sector has grown to 12.3% from 5.9% during the June quarter a year ago. Among other services sectors, while financing and real estate maintained a steady growth of 9.4% in June quarter against 9.3% a year ago, trade, hotels and transport decelerated to 8.1% from 10% a year ago.
Imminent boost from farm sector on account of good monsoons combined with pay hike to central government employees are expected to significantly push economic growth in the remaining quarters of 2016-17. But there is no doubt that the deceleration in economic growth in a few sectors can pull down the overall growth story.
The author is senior fellow, Pahle India Foundation