GDP Day Guide: Understanding How The Indian Economy Is Faring

Growth data due to be released by the government’s statistical wing today will likely show that the Indian economy continued to strengthen in the January-March period.

A survey of Bloomberg economists showed that GDP growth is expected at 7.4 percent in the fourth and final quarter of 2017-18. This would be an improvement over the 7.2 percent growth reported in the third quarter and would suggest that the economy has repaired itself after being hit by the twin shocks of demonetisation and GST.

Estimates for growth in the final quarter of the last fiscal range from a low of 7 percent to a high of 7.8 percent, showed the survey data available on Bloomberg.

GDP growth for the fourth quarter and FY18 is likely to spring a positive surprise, wrote Soumya Kanti Ghosh, chief economist at SBI in a note this week. “We expect GDP growth for Q4FY18 would be around 7.6 percent and subsequently the FY18 growth would be at 6.7 percent.”

Will Consumption Hold Up?

Private consumption has held up the Indian economy even as industrial growth has seen volatility. However, there was some slackening of consumption growth in the third quarter when private final consumption grew by 5.6 percent compared to 6.6 percent in the second quarter.

Data on this part of the economy will be closely watched to see if the Indian consumer remains upbeat. Recent indicators have suggested that rural consumption has picked up, adding to consistent strength in urban consumption. “Growth should benefit from an acceleration in rural consumption, supported by higher minimum support prices and a normal monsoon,” noted Moody’s Investors Service in a report yesterday. The rating agency, however, cut its growth forecast for 2018 to 7.3 percent from 7.5 percent earlier. Higher oil prices and tighter financial conditions will weigh on the pace of acceleration in growth, Moody’s noted.

Is Private Investment Gathering Steam?

A more crucial question for the Indian economy is whether private investment is gathering steam. The third quarter GDP data showed a surprise 12 percent jump in gross fixed capital formation. Strong data for this expenditure component of GDP would give policy makers greater comfort on the outlook for the economy.

High frequency indicators such as order inflows reported by capital goods firms and sporadic announcement of brownfield investments by domestic firms suggests that there is at least a modest pick-up in private investment activity.

“The private investment cycle will continue to make a gradual recovery, as twin balance-sheet issues – impaired assets at banks and corporates – slowly get addressed through deleveraging and the application of the Insolvency and Bankruptcy Code,” said Moody’s.

Are Employment Intensive Sectors Strengthening?

The sectoral break-up released as part of the GDP data will be watched to see whether employment intensive sectors are continuing to strengthen.

The trends thrown up by the third quarters showed some pick-up in momentum. The manufacturing sector grew by 8.1 percent in the third quarter compared to 6.9 percent in the second quarter. “We expect 9 percent growth in manufacturing GVA (gross value added) in Q4 due to smart growth in corporate GVA as both of these are strongly positively correlated,” SBI’s Ghosh wrote in his report.

The construction sector also saw revival in the October-December period and grew by 6.8 percent compared to the 2.8 percent growth in the preceding quarter. The government’s focus on rural housing and infrastructure and housing is expected to be positive for this sector.

The financial services segment could also see some strength given that loan growth has picked up in recent months.

Growth Support For Rate Hikes?

Should growth continue to strengthen as expected, the monetary policy committee may find it easier to shift towards a more hawkish stance at its policy review next week. Retail inflation rose in April to 4.8 percent, moving further away from the mid-point of the MPC’s target of 4 (+/-2) percent. Core inflation rose to 44-month high of 5.9 percent.

Should growth continue to rebound, the MPC may have greater comfort in moving towards interest rate hikes in order to protect the Indian economy from rising inflation risks in the face of higher oil prices.