Sparks fly as a worker uses an angle grinder to cut a sheet of steel at a factory in Ahmedabad, Gujarat, India. (Photographer: Anindito Mukherjee/Bloomberg)

India’s GDP Grows At 7.7% In March Quarter As Recovery Strengthens

India’s economy expanded at its fastest pace since demonetisation as government spending continues to drive the recovery.

GDP rose at 7.7 percent in the fourth quarter of 2017-18 compared with 6.1 percent in the same period last year, and a revised 7 percent in the quarter ended December, according to data released by the Central Statistics Office today. A Bloomberg poll of economists had pegged the growth at 7.4 percent.

For the full financial year, GDP grew at 6.7 percent compared with 7.1 percent in the previous year. Gross value added growth, which strips out the impact of indirect taxes and subsidies, stood at 7.6 percent in the January-March quarter and at 6.5 percent for the full year.

“The economy is certainly recovering. But if one breaks the numbers a little, a lot of it is essentially being driven by public expenditure,” Pronab Sen, former chief statistician of India, said. “That’s a good thing because we needed a certain bit of priming.”

Asia’s third-largest economy is recovering from the twin shocks of demonetisation and the goods and services tax. The 6.7 percent growth in 2017-18 was the worst since Prime Minister Narendra Modi was voted to power. Even with improving growth, problems remain aplenty as Modi enters the last year of his term. Surging crude oil prices, trade tensions between U.S. and China, and a rout in the emerging markets have clouded the economic outlook. Moody’s Investors Service cut the nation’s growth forecast due to downside risks.

Sectorally, the rebound was led by the manufacturing and construction sectors, aided partly by the base effect as demonetisation had hurt activity in these sectors.

“Definitely the base effect has also played a role. Construction had seen a tremendous contraction in the corresponding quarter last year,” said Shubada Rao, chief economist at Yes Bank. “But the economy and the momentum is picking up and that’s positive news to carry forward.”

Last three quarters have been relatively positive. The onus has been entirely on the government’s side to revive the capex.
Shubada Rao, Chief Economist, Yes Bank

According to Rao, while construction and government-linked sectors were expected to do the “heavy lifting”, agricultural growth was a surprise.

Investment-Consumption Mix

A break-up of expenditure showed that consumption held steady, while investment continued its sharp recovery, mainly due to higher government spending.

Government consumption expenditure rose at 16.8 percent compared with 6.8 percent in the three months to December 2017 and 2.9 percent in the quarter ended September 2017.

Gross fixed capital formation, a measure of private investment, grew at 14.4 percent in the fourth quarter compared with 9 percent in the previous quarter and 6.6 percent in July-September 2017. Anecdotal evidence suggests that a modest pick-up has begun and could continue in 2018-19.

“The 14 percent growth is the total of public plus private investments. One would want to really want to know what the break-up is,” Sen said. “Because we do know the one sector which has come in fairly strongly—construction—at its was stronger than anyone expected.”

Construction has been driven essentially by public infrastructure spending. If that’s the case then you may have a situation where the strong growth in fixed capital formation is essentially a public investments driven figure. That’s necessarily not very sustainable.
Pronab Sen, Former Chief Statistician of India

Private consumption remains the bulwark of the Indian economy. In the January-March quarter, private consumption expenditure grew by 6.68 percent in constant pricing terms. That compares with 5.8 percent in the quarter ended December 2017 versus 6.5 percent in the quarter ended September 2017.

Credit Suisse On GDP

The global brokerage said in a note that there are multiple headwinds for GDP growth in the current financial year.

We continue to believe the best in growth is behind us—slowing government expenditure growth (state plus centre, FY19 budgeted), ongoing  weakness in farm prices, a reversal in the trend of lending rates, and a drain on income from higher oil are headwinds.
Credit Suisse Note

Government expenditure continued to rebound as percentage of GDP, and is now the highest in nearly five years, it said. Despite the positive commentary from companies on consumption in the fourth quarter, private final consumption expenditure growth was just 6.7 percent despite weak base. With nominal agricultural growth still struggling, this may persist, it added.