Weak Investment Keeps A Lid On GDP Growth In July-September Quarter
Economy continued to be driven by consumption while investment lags
The Indian economy grew at 7.3 percent in the second quarter of the current fiscal year, lower than the 7.5 percent forecast by economists. While slightly weaker than expected, the growth trend has so far has been in line with the forecast of achieving 7.6 percent growth this fiscal. This could change with growth seen weakening in the third and fourth quarters of the year due to the impact of demonetisation.
So far, though, data shows that growth in the economy was holding above the 7 percent mark.
The country’s gross domestic product grew 7.3 percent in the July-September quarter compared to 7.1 percent in the previous quarter. Gross value added, a second way to judge growth in the economic activity, rose 7.1 percent during the quarter.
The Sectoral Performance
Gross value added across the agricultural sector grew 3.3 percent in the second quarter compared to 1.8 percent in the same quarter last year, reflecting a strong monsoon. In contrast, the mining sector was weak due to the timely onset of rain and contracted 1.5 percent compared to a contraction of 0.4 percent last year.
For the manufacturing sector, gross value added during the three-month period rose 7.1 percent, materially weaker than the 9.1 percent growth registered last year. Financial Services grew at 8.2 percent compared to 9.4 percent last year.
Overall, growth across industry slipped to 5.2 percent in the second quarter from 6 percent in the first quarter. Services grew at 8.9 percent in the July-September compared to 9.6 percent in the preceeding three months.
Agriculture and allied activities is the only sector which has sustained growth. Agriculture growth will pick up further as normal rainfall in 85 percent of the country will lead to higher sowing area and yield for most of the Kharif crops.Soumya Kanti Ghosh, Chief Economist, State Bank of India
Consumption Vs Investment
The divide between consumption growth and investment growth persisted even in the second quarter with no indication of a pick up in the private investment cycle.
Gross fixed capital formation, at constant prices, contracted by 5.6 percent. In the first quarter of the year, this indicator, which reflects investment in the economy, showed a contraction of 3.1 percent. Gross fixed capital formation has now contracted for three consecutive quarters.
Consumption growth, however, remained healthy driven by government spending.
Government final consumption expenditure rose 15 percent after an increase of 18.7 percent in the previous quarter. Private final consumption expenditure rose 7.6 percent compared to 6.7 percent last quarter.
Government spending is the only thing supporting growth but it isn’t enough to spur investment. Capacity utilisation remains well below 80 percent which means there is no reason for anyone to invest. Further, with demonetisation, there may be some drop in consumption which could delay any pick-up in investment. Given the current scenario, 7 percent growth for the fiscal year would be good but there are downside risks even to that number.Madan Sabnavis, chief economist, CARE Ratings
The Demonetisation Hit
The growth scenario in the economy could change significantly in the second half of the year due to the government’s decision to withdraw Rs 500 and Rs 1000 notes from circulation. This has left the country facing a cash crunch which is impacting consumption in the economy.
While there is no consensus on the magnitude of the hit to GDP growth, most economists have pared down their growth estimates for the current fiscal.
Yes Bank has revised its growth estimate down to 6.7 percent from 7.6 percent earlier.
We expect demonetization to accrue significant benefits in the medium term through formalization of the economy. In the short-term however, we expect significant negative impact on growth as economic agents adjust to liquidity crunch.Shubhada Rao, Chief Economist, Yes Bank
Fitch Ratings has revised down its growth estimate for the year to 6.9 percent from 7.6 percent earlier. The revision reflects “temporary disruptions to activity related to the RBI's surprise demonetisation of large-denomination bank notes” said the rating agency.
Bank of America-Merrill Lynch sees a 30 basis point hit to its growth forecast of 7.4 percent for fiscal 2017, while HSBC has predicted a 70-100 basis point impact on growth due to demonetisation.
In an exclusive interview to BloombergQuint earlier this week, RBI governor Urjit Patel said that the RBI would share its estimates of the short term and long term implication of demonetisation as part of the monetary policy announcement on December 7.