India GDP Growth: Economy Limps, Grows At 5.6% In The First Quarter

A steady decline in economic momentum, which began in the second quarter of the last financial year and worsened in the fourth quarter, perhaps due to demonetisation, has extended into the new fiscal.

The Indian economy grew at 5.6 percent in gross value added (GVA) terms in the first quarter of the current fiscal, showed data released by the government on Thursday. Growth in the April-June quarter was on a par with the 5.6 percent expansion in GVA in the fourth quarter, and significantly lower than the 7.6 reported a year ago.

The GVA growth reported was also below estimates. A Bloomberg poll had pegged GVA growth at 6.2 percent in Q1 of FY18.

The country’s gross domestic product (GDP), which includes the impact of taxes and subsidies, grew at 5.7 percent in the first quarter, coming in lower than the 6.1 percent growth reported during the fourth quarter. In GDP terms, growth is at its lowest since 2014.

GVA growth has become a preferred measure of economic growth as it strips out the impact of indirect taxes and subsidies. In particular, this fiscal, when the government has front-loaded subsidy expenditure (with the Budget being advanced to February 1), and normal flow of indirect taxes has been disturbed (due to the implementation of GST), growth in GVA provides a better indicator of trends in the economy.

No matter which measure you choose to look at, data released on Thursday suggests that the underlying momentum in the economy has weakened compared to last year. There were two elements to the weak GVA growth, TCA Anant, chief statistician of the country explained at a press conference. One of these elements is the rise in prices, while the second is reduction in inventories during the April-June quarter ahead of the Goods and Services Tax rollout, Anant explained while adding that both these elements should normalise starting from the second quarter of the fiscal year.

The Inflation Impact On Growth

Growth in the economy is measured in nominal terms (which includes the impact of price changes) and then adjusted for inflation (using the deflator) to derive growth in real terms.

In the first quarter of last fiscal, wholesale inflation was in negative territory and hence the deflator was low. This meant that real growth appeared higher. The situation has reversed this year and the wholesale price index is back in positive territory. This means that the comparative real growth in Q1FY18 is looking significantly weaker than in Q1FY17.

However, even if you look at growth in nominal terms (as measured by GVA growth at current prices), there is slackening of momentum. GVA growth at current prices stood at 7.9 percent in Q1FY 18 compared to 8.7 percent in Q1FY17. In real terms, the slowdown looks starker, with growth slowing by 2 percentage points to 5.6 percent in the first quarter compared to 7.6 percent in the same period last year.

Expenditure Trends

Another way to look at trends in the economy is to understand where the expenditure is coming from. That data suggests that government spending remains strong, consumer spending has held steady and investment remains stagnant.

• Private final consumption expenditure grew at 6.6 percent in the first quarter.
• Government final consumption expenditure grew at 17.1 percent in the first quarter
• Gross fixed capital formation grew at just over 1 percent in the first quarter

As a percentage of GDP, gross fixed capital formation now forms less than 30 percent.

Sectoral Trends

Sectoral data released by the government shows that manufacturing remains the weak spot. Growth in financing and construction segments, which was knocked down by demonetisation, is yet to normalise to levels seen before the cash ban hit the economy.

• GVA growth in agriculture stood at 2.3 percent in Q1 compared to 2.1 percent last year
• GVA growth in manufacturing stood at 1.2 percent compared to 10.7 percent last year
• GVA growth in construction stood at 2 percent compared to 3.1 percent
• Trade, hotels and transport segment grew by 11.1 percent compared to 8.9 percent
• Finance, insurance and real estate grew at 6.4 percent compared to 9.4 percent

Reacting to the data, economists said that weaker than expected growth may have been on account of both GST and demonetisation.

D.K. Joshi, chief economist at Crisil said that while growth will inch up in subsequent quarters, the weaker than expected first quarter growth may prompt downward revisions in GDP estimates. The Reserve Bank of India has forecast growth of 7.3 percent for the current fiscal but acknowledged downside risks to this projection at the last meeting of the monetary policy committee in August.

“Growth will gradually inch up as the impact of demonetisation fades and as the destocking factor due to GST goes away. But it will be a gradual improvement. We will be revising our estimate of 7.4 percent downwards shortly,” said Joshi.