India Sees FY18 GDP Growth At 6.5%

The Indian economy is expected to grow at the slowest pace since 2014 in the current financial year due to weaker growth in the farm sector and in manufacturing. The evidence of persisting weakness in economic growth comes at a time when room for fiscal and monetary stimulus is limited, suggesting that a revival remains dependent on a pick-up in private consumption and investment.

First advance estimates released by the government’s Central Statistical Organisation peg GDP growth for 2017-18 at 6.5 percent compared to 7.1 percent last year. Nominal GDP growth, which builds in inflation, is seen at 9.5 percent in the current year compared to 11 percent last year.

Growth in gross value added terms, which strips out the impact of indirect taxes and subsidies, is pegged at 6.1 this year, versus a revised 6.6 percent last fiscal.

Both GDP and GVA growth were marginally below expectations. A Bloomberg poll had pegged GDP growth at 6.7 percent. The RBI had forecast GVA growth at 6.7 percent at the time of its last policy review in December.

“Given that this has been a year with heightened uncertainty and volatility, it is not completely unexpected,” Siddharth Sanyal, chief economist at Barclays Bank, told BloombergQuint in an interaction. Sanyal added that weakness in the farm sector due to delayed rains in some parts of the country had impacted agricultural output. Uncertainty driven by demonetisation and the implementation of GST weighed on other segments like manufacturing, he added.

The Indian economy has been hit by twin shocks—demonetisation and GST—over the past 14 months. In response, growth in segments like financial services, real estate and manufacturing has turned volatile. In addition, government spending linked segments like ‘public administration, defence and other services’ also saw a slowdown in the second quarter of fiscal 2018, based on data released by the CSO in November.

According to the data released by the CSO:

• Growth in the farm sector is seen at 2.1 percent from 4.9 percent last year
• The manufacturing sector is seen growing at 4.6 percent versus 7.9 percent
• The construction sector is expected to grow at 3.6 percent versus 1.7 percent
• The financing, real estate and insurance segment is seen growing at 7.3 percent compared to 5.7 percent
• The government spending linked public administration segment is expected to grow at 9.4 percent versus 11.3 percent

The first advance estimates released by the CSO are used by the government to prepare the budget for the upcoming financial year. The estimates are prepared using actual sectoral data available for about seven months of the year, along with other indicators such as financial results of the private corporate firms.

The full-year estimates suggest that the reversal of the slowdown which began in the July-September quarter, gained some pace in the second half of the year. Based on the full year GVA growth estimate of 6.1 percent, growth is the second half needs to hit 6.35 percent. GVA growth in the first and second quarters of the year stood at 5.6 percent and 6.1 percent, respectively.

Expenditure trends suggest that investment in the economy picked up in 2017-18, albeit moderately.

• Gross fixed capital formation, which reflects private investment, is seen rising by 4.5 percent in fiscal 2018 compared to 2.4 percent last year.
• Private final consumption expenditure, an indicator of consumer spending, is seen rising by 6.33 percent in fiscal 2018 compared to 8.7 percent last year.
• Growth in government final consumption expenditure is pegged at 8.5 percent compared to 20.8 percent last fiscal.

“While there is some pick up in growth in capital formation, we must remember that it is on a very low base,” said Sanyal of Barclays while adding that it is not time to ‘celebrate’ a revival in investment yet. The contribution of gross fixed capital formation to GDP slipped further in FY18 to 29 percent compared to 29.5 percent last year.

Responding to the data, Rajiv Kumar, vice chairman of NITI Aayog said that GDP growth is expected to be more robust in 2018-19.

Options before the government to push economic growth are limited. Weaker indirect tax revenues have put government finances under strain, leaving no room for increased government spending. The government’s fiscal deficit in the April-November period hit 112 percent of the budget target, forcing the government to increase its planned borrowings for the year.

Monetary policy, meanwhile, is constrained due to rising inflation. The RBI is widely expected to keep interest rates on hold as inflation is expected to move higher. In November, retail inflation hit a 15-month high of 4.88 percent.