A worker works while sparks fly as molten steel is poured from a ladle at an arc furnace in the steel melting shop of the Jindal Steel & Power Ltd. plant in Raigarh, Chhattisgargh, India. (Photographer: Udit Kulshrestha/Bloomberg)

FY19 GDP: Economic Growth Estimated At 7.2% 

The Indian economy will grow at its fastest pace in three years in the current financial year, as it recovers from the twin shocks of demonetisation and the implementation of the Goods and Services Tax.

GDP growth is expected at 7.2 percent in 2018-19 compared to 6.7 percent last year, according to the first advance estimates released by the Central Statistics Office today. Gross Value Added, which strips out indirect tax and subsidies, is expected to grow at 7 percent compared to 6.5 percent last year.

Both GDP and GVA growth estimates are in line with economist expectations. A Bloomberg poll had pegged GDP growth forecast at 7.2 percent for 2018-19 while the RBI had projected the growth at 7.4 percent at the time of its last policy review in early December.

Growth in the first and the second quarter of the current financial year have been estimated at 8.2 and 7.1 percent, respectively. The advance estimates suggest a slower pace of growth close to 6.75 percent in the second half of the year.

The first advance estimates are prepared using actual sectoral data available for about seven months of the year, along with other indicators such as financial results of private companies. The CSO estimates are used by the government to prepare the budget for the upcoming financial year. The finance minister is expected to present the interim budget on Feb. 1, 2019.

Sectoral Trends

A break-up of the GVA data shows an improvement in manufacturing and construction in 2018-19 over the previous year. However, growth in the services economy, including financial services, will remain modest this year.

According to the data released by the CSO:

  • Growth in the farm sector is seen at 3.8 percent compared with 3.4 percent in the previous year.
  • The mining sector is likely to grow at 0.8 percent against 2.9 percent.
  • Manufacturing is seen growing at 8.3 percent versus 5.7 percent.
  • The construction sector is expected to grow at 8.9 percent versus 5.7 percent.
  • The trade, hotels and communication segment will grow at 6.9 percent versus 8 percent last year.
  • The financing, real estate and insurance segment is seen growing at 6.8 percent compared with 6.6 percent.
  • The government spending-linked public administration segment is expected to grow at 8.9 percent versus 10 percent.

Despite manufacturing estimated to show strong growth this financial year, the Index of Industrial Production (IIP) is expected to remain under 6 percent, further widening the gap between both indicators, noted D.K. Joshi, chief economist at CRISIL. Additionally, he added that moderating growth in services sector could become a cause of worry.

The services sectors, which were a leading engine of India’s growth, are now trailing other industries since the past several quarters, becoming a cause of worry.
D.K. Joshi, Chief Economist, CRISIL

Expenditure Trends

Expenditure-side data suggests that investment in the economy has picked up this year while consumption growth has flat-lined.

Gross fixed capital formation, which reflects private investment, is estimated to grow 12.2 percent in fiscal 2019 compared with 7.6 percent in the previous year at constant prices. The investment pick-up, however, continues to be driven by government spending, said Joshi.

Pick-up in investment is largely government spending from outside the budgeted expenditure, likely from PSU’s and state governments. Private investment has to substitute for this investment for the run-up to be sustainable.
D.K. Joshi, Chief Economist, CRISIL

Private final consumption expenditure, reflecting consumer spending, is seen rising by 6.4 percent compared with 6.6 percent. While consumption growth has not fallen sharply, it has been stuck in the 6-7 percent range, said Shubhada Rao, chief economist at Yes Bank. We would need some measures, such as a push for the rural economy, to push up consumption growth beyond this range, Rao said.

Growth in government final consumption expenditure is pegged at 9.2 percent compared with 10.9 percent in the last fiscal.

Fiscal And Monetary Implications

The lower than expected nominal GDP growth will mean that fiscal deficit as a percentage of GDP could be higher, said Joshi. The government is struggling to meet its fiscal deficit target of 3.3 percent of GDP for 2018-19. Most economists expect a fiscal deficit of closer to 3.5 percent of GDP.

While the data may not have a direct bearing on monetary policy, it will strengthen the case for a shift in monetary policy stance back towards ‘neutral’ in the February policy review. Inflation has fallen well below expectations and growth has moderate compared to the RBI’s original estimates, supporting easier monetary policy.