In the three months to June, the economy grew at 5.7%, the slowest in the past 13 quarters. Manufacturing was at a five-year low, mining collapsed and construction stagnated. The slowdown corroborates the corporate results for the first quarter of this fiscal, which had shown net profits declining for many listed firms. Agriculture growth in real terms, too, slowed to 2.3% from 5.2% in the fourth quarter. Services sector growth, however, anchored overall gross value added (GVA) growth, rising 8.7% from 7.2% in the fourth quarter of FY17, driven by improvement in trade, hotels, transport and financial services.
The growth in GVA was 5.6% in Q1FY18, which was the same in Q4FY17, indicating that the waning demonetisation impact was offset by rising anxiety over the goods and services tax. While growth has been moderating since the middle of 2016, the weak print in the GDP can be attributed to some specific factors such as GST related destocking, demonetisation, rupee appreciation and higher subsidy payout. While some of these could reverse over the next few quarters, others may not.
The growth in GDP continues to be driven by private consumption and government spending. There was a mild improvement in investment growth as compared to the previous quarter which pulled up the share of fixed investments to 29.6% of GDP in Q1FY18 from 28.5% in the previous quarter. The impact from GST should be transitory once the one-time adjustment to the new tax regime has been made. With normal monsoon, softer interest rates and falling inflation, economic growth should recover in the next few quarters.