GDP growth picks up pace
Aided by stepped up government spending, a surprise uptick in agricultural output and and sharper value creation in the manufacturing sector, India’s GDP growth picked up in second quarter of the current fiscal to 7.4%, from 7% in the previous quarter and 8.4% a year ago, the Central Statistics Office (CSO) said on Monday. While India’s growth looked impressive compared with China’s 6.9% in the same quarter, analysts saw only early signs of a recovery and lamented about the relatively weak private consumption, the collapse of the construction sector and continued sluggishness in external demand. They, however, expected the Reserve Bank Of India to hold key rates on Tuesday, as it had administered a sharper-than-expected 50-basis-point cut at its last meeting on September 30.
Though the 6.8% growth in gross fixed capital formation — a gauge for fixed investment — in the quarter was the highest since the first quarter of 2014-15, aided by improved government spending, private consumption expenditure remained weak, with growth slowing to 6.8% in the July-September period from 7.4% in the previous quarter. The government’s capital expenditure in the April-October period stood at 59% of the budget estimate for FY16; in the same period last year, such spending was only 48% of the full-year target. Government consumption expenditure rose 5.2% in the second quarter, against 1.2% in the first quarter.
Real gross value added (GVA) grew 7.4% in the September quarter — the same as the gross domestic product (GDP) — and compared with 7.1% in the previous quarter, despite robust growth in indirect tax mop-up from a year before. Government officials explained that according to the new methodology formulated by the International Monetary Fund, adopted by the CSO, only the real growth in the underlying indirect tax base is taken into account while calculating the GDP at market prices and the increase in mop-up owing to an increase in tax rates is reflected as only “a rate of change in price”.
Indirect tax collections between April and October rose 35.9% from a year before, partly reflecting the additional measures taken to boost revenue receipts including the excise increases on diesel and petrol and the increase in service tax rates from 12.36% to 14%.
Importantly, nominal GDP grew just 6% in the second quarter, compared with 8.8% in the first quarter and much lower than 13.6% a year before. Nominal GDP growth in Q2 was lower even than the real one as inflation measured via the GDP deflator remained subdued at -1.3%, mainly as wholesale price inflation dropped to -4.5% in the September quarter. The lower nominal GDP growth could add to the government’s pressure to meet the fiscal deficit target of 3.9% of (nominal) GDP for the year, especially when the 7th pay commission has recommended much higher salaries for central government employees.
The data showed while the services sector continued to put up a decent show, manufacturing growth sustained a momentum built up lately and scaled a three-year high of 9.3% in the September quarter. The robust manufacturing growth suggests value addition may have risen at a much faster pace than output, as reflected in the subdued growth for the sector in the index of industrial production (IIP). Manufacturing output in the IIP grew just 4.6% in the September quarter from a year before.
However, what surprised the analysts most was the growth in the farm and allied sectors despite a second straight year of deficient monsoon. The GVA in the agriculture and allied sectors grew 2.2% in the second quarter, compared with 1.9% in Q1. The GVA in mining grew 3.2% in the September quarter, lower than 4% in the first quarter. The construction sector, however, performed poorly as it witnessed a just 2.6% expansion in the second quarter, against 6.9% in the previous quarter.
Abheek Barua, chief economist at HDFC Bank, said: “This suggests still a fairly tepid performance in the economy although some of the gains are essentially due to value addition, low commodity prices and so on. Prima facie, the number seems reasonably good. Clearly we are stuck in a groove which is considerably lower than what our potential is.”
“The key surprise in the initial growth data for Q2FY16 is the uptick in growth of agriculture, forestry and fishing, belying the concerns regarding the extent of drag generated by the unfavourable monsoon on the crop sector,” said Aditi Nayar, senior economist at Icra.
“Continued growth momentum of financial sector and robust manufacturing growth (highest since 2QFY13) is encouraging. Despite decline in inflation and monetary easing, decline in 2QFY16 consumption growth from 1QFY16 is puzzling. Growth in fixed capital formation continued to inch up from 3QFY15,” said India Ratings.