GDP analysis in six charts: Why jobs continue to be the sore point for Narendra Modi

India’s GDP growth slumped to a three-year low of 5.7 percent during April-June – lagging China for the second straight quarter – as manufacturing slowed ahead of the GST launch amid demonetisation effect. China clocked a record 6.9 percent growth in January-March and April-June quarters. [caption id=“attachment_3994663” align=“alignleft” width=“380”]  Reuters[/caption] The expansion in gross domestic product (GDP) was 6.1 percent in the preceding quarter and 7.9 percent in the same period last fiscal. The previous low of 4.6 percent was recorded in January-March 2014. Gross value added (GVA) in the manufacturing sector fell sharply to 1.2 percent, from 10.7 percent year on year, as the businesses focussed more on clearing inventories rather than production ahead of the 1 July launch of GST. Demonetisation of high-value currency notes in November last year impacted economic activities in the January-March quarter as GDP growth slipped to 6.1 percent and further to 5.7 percent in the three months to June. The data released by the Central Statistics Office (CSO) came in below market expectations, which predicted it to be at least a tad higher than January-March growth figure of 6.1 percent. Here’s an analysis of the six key data points:

GDP growth (YoY in %)
Infogram

For eight quarters from January-March 2015 to October-December 2016, India consistently remained the fastest growing economy, surpassing China. The government has been boasting around about the tag, which doesn’t mean nothing much other than that the country is a bright spot in the gloomy global economic scenario. However, for the last two quarters India lost the top slot due to the twin effect of demonetisation and GST. Experts aver it would a few more quarters for India to win back the tag. 

GDP growth trend (YoY in %) Infogram

According to rating agency Crisil, the GDP slowdown in the first quarter of the current fiscal corroborates with corporate results during the period, which had shown net profits declining for a chunk of listed firms. “The computation of GDP relies heavily on corporate data from the Ministry of Corporate Affairs database. The slowdown reflects sharp deceleration in exports of goods, and some moderation in consumption growth,” it said.  

GVA growth (YoY in %) Infogram

While overall GVA has remained steady during the quarter on a sequential basis, on-year it shows a 2 percentage point decline. However, in the previous quarter the on-year fall was a deeper 3 percentage point. Crisil has noted that the government has also revised down GVA growth for the fourth quarter of last fiscal by 50 basis points to 5.6 percent, suggesting that the impact of demonetisation on the economy was more than earlier estimated. 

Sectoral GDP growth (YoY in %) Infogram

Among the sector’s that have seen 7 percent or more GVA are ’trade, hotels, transport & communication and services related to broadcasting’, ‘public administration, defence and other services’ and ‘electricity, gas, water supply & other utility services’. Icra’s Aditi Nayar noted that the pace of growth of industry and agriculture was lower than anticipated whereas the service sector’s growth exceeded the rating agency’s forecast. “The combination of lower volumes and higher discounts offered to reduce inventories ahead of GST, and the turnaround in average WPI inflation weighed upon the manufacturing GVA growth in Q1 FY2018. The lingering impact of demonetisation, as well as the effect of RERA, is visible in the low 2.0% growth of construction in Q1 FY2018. The trade, hotels, transport, communictation etc. sub-sector was the biggest driver of growth in Q1 FY2018, mirroring the transient discount-induced uptick in sales ahead of GST, as well as improvement in indicators such as rail freight, air cargo freight, fuel consumption etc,” Nayar said in a statement.

Consumption expenditures at constant prices in Rs cr
Infogram

As far as consumption expenditure is concerned the boost came from the government’s side during the quarter. However, as Nayar notes, the sharp rise in imports weighs on the number. “Despite the discount-fuelled uptick in consumption in Q1 FY2018, growth of private final consumption expenditure recorded a sequential moderation,” Nayar said. Overall, going ahead one will have to closely watch the how companies are restocking after the GST rollout. However, as Nayar says, it is unlikely that the economy will meet the 7 percent growth target for the current financial year given the sharp fall in the first quarter. 

Gross fixed capital formation at constant prices in Rs crore Infogram

The gross fixed capital formation or investment has witnessed a marginal growth of 1.6 percent during the quarter from the 2.1 percent contraction in the previous quarter. However, this is just a small relief considering the private sector activity remained subdued. As a percentage of GDP, the GFCF has seen a slight improvement to 29.8 percent from 28.5 percent in the previous quarter. However, a year ago the corresponding figure was 31 percent. It has to be noted that for the last 8 quarters, the GFCF has remained in a tight range of 28.5-31.2 percent of GDP. In absolute terms, the amount ranged between Rs 8.5 lakh crore and Rs 9.4 lakh crore. Unless there is a pick up in these figures, one cannot expect an improvement in the jobs scenario. And for Prime Minister Narendra Modi, who came to power promising millions of jobs, this has remained a sore point. It remains to be seen whether he will be able to fulfil his promise before 2019 elections. (With inputs from Rajesh Pandathil, PTI)