A worker stands on scaffolding as he trowells cement at the construction site of an apartment. (Photographer: Kuni Takahashi/Bloomberg)

8.2% GDP Growth In The First Quarter Cements India’s Economic Recovery

India’s economy returned to 8 percent growth for the first time in two years, as strong consumer demand has spurred a modest revival in private investment.

Gross domestic product growth in the first quarter of 2018-19 was at 8.2 percent compared with 5.6 percent in the same quarter last year, according to data released by the Central Statistics Office today. In the fourth quarter of 2017-18, GDP growth was at 7.7 percent.

A Bloomberg poll of economists had pegged the growth at 7.6 percent. The range of estimates stretched from a low of 7 percent to a high of 8.2 percent.

In gross value added terms, the economy grew at 8 percent compared to 5.6 percent last year. GVA growth has become a preferred measure of economic growth as it strips out the impact of indirect taxes and subsidies.

Saugata Bhattacharya, chief economist at Axis Bank who had forecast growth of 8.2 percent, said the higher growth was a combination of a low base and better output. “The corresponding quarter of the last year was just prior to the (rollout of) Goods and Services Tax. There was a lot of inventory destocking that had happened.”

The base effect has contributed to the growth, but almost as much, if not more, has come in from an actual economic recovery. 
Saugata Bhattacharya, Chief Economist, Axis Bank

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All-Round Strength

Strong growth in the first quarter has been supported by a positive base effect due to weak quarter in the comparable quarter. However, economic conditions have also steadily improved as the impact of the twin shocks of demonetisation and GST has faded.

Data for the first quarter showed strong growth in sectors like manufacturing and construction on a GVA basis. Wild card agriculture also showed strong growth.

  • The manufacturing sector grew at 13.5 percent compared to -1.8 percent last year.
  • The construction sector grew at 8.7 percent compared to 1.8 percent last year.
  • The mining sector grew at 0.1 percent compared to 1.7 percent last year.
  • The agriculture sector grew at 5.3 percent compared to 3 percent last year.
  • The financial services sector grew at 6.5 percent compared to 8.4 percent last year.

The strength in manufacturing and constructions, both of which are large employers, bodes well for jobs in the economy.

Manufacturing, construction and public administration were the three fastest growing sectors in Q1 FY 19. While the former two sectors benefited from a favourable base effect, which would wane going forward, the extent to which government expenditure can prop up growth in the remaining quarters of FY 19 without contributing to a fiscal slippage, would take a cue from revenue buoyancy.
Aditi Nayar, Senior Economist, ICRA

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Step-Up In Investment

Continued strength in urban consumption demand and hope of stronger rural demand after a good monsoon have spurred some private investment. While large capex from industries like power is seen as unlikely, a fresh round of investments has started from consumer facing industries like automobiles.

The expenditure side data for the first quarter is reflective of these trends. In constant price terms, investment remained positive the fifth consecutive quarter.

  • Gross fixed capital formation grew at 10 percent, following 14.9 percent growth in Q4 of FY18
  • Private consumption expenditure grew at 8.6 percent after 6.7 percent growth in the last quarter
  • Government expenditure rose 7.5 percent compared to 16.8 percent in the last quarter.

“Investments will continue to look up,” said Dharmakirti Joshi, chief economist at CRISIL Research, referring to government’s efforts to build roads and houses. “But a broad-based investment recovery led by the private sector is hampered by capacity overhang, high leverage, and political uncertainty.”

Outlook For The Year Ahead

While growth in the April-June quarter has surpassed most analysts’ expectations, most expect growth to flatten out in the quarters ahead. They also point to economic challenges emerging from the external sector, which could some detrimental impact on growth rates.

The question is can this momentum be sustained, asked Sonal Varma, India economist at Nomura Research in a note after the GDP data. “We have our doubts given both global and domestic headwinds. Our leading indicators are also pointing to a slowdown ahead.”

For the full year, the Reserve Bank of India expects growth at 7.4 percent.

Sustaining GDP growth at over 8 percent over the next few years would require significant traction in private investments and relentless implementation of reforms to raise productivity, said DK Joshi, chief economist at CRISIL in his note. Joshi noted that there are some positive signs.

An encouraging development is the slow but steady rise in private consumption spending growth. From 6.7 percent in Q4 FY18, it rose to 8.6 percent in Q1 FY19 -- the highest in six quarters....For private investments to pick up, a strong and sustained revival in household spending is critical.
DK Joshi, Chief Economist, CRISIL

Also read: India's World-Beating Growth Not Enough to End Jobs Drought