GDP at 2-year high of 8.2% in Q1: Economy is finally coming out of twin shocks, but there is a bumpy ride ahead

The sharp jump in the first quarter gross domestic product (GDP) numbers is heartening; it gives some hope that economy could stage a sharp recovery post a long lull phase. The jump is partly due to the base effect, on account of Goods and Services Tax (GST) destocking prior to the GST (goods and services tax) roll out and hence lower numbers last year, but even if one discounts that, the jump is significant in Q1. The growth at 8.2 percent, compared with 5.6 percent in the year-ago quarter and 7.7 percent in the preceding quarter, has come at a two-year high. What is more important is that the growth is propelled by notable performance in two major job-creating sectors—-manufacturing and agriculture. [caption id=“attachment_4280443” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] The manufacturing sector, where the growth has been tepid for many consecutive months, grew at 13.5 percent in Q1 compared with a contraction of 1.8 percent in the corresponding quarter of the previous year. Similarly, agriculture grew at 5.3 percent compared with a 3 percent growth in the year-ago quarter. Post-demonetisation, India was nowhere near the 8 percent growth mark and the near-term shocks in the economy on account of GST, demonetisation shocks were dragging down growth by a good margin. Is the economy finally past the slowdown phase? The next few quarters could offer a pattern. If the momentum sustains, India could end up above 7.5 percent average growth in FY19 and there are even hopes of returning to an above 8 percent growth levels in days not very far from here. What is not very encouraging is the trend in gross fixed capital formation (GFCF) numbers. While the growth is healthy here, as a percentage of GDP, the share is not picking up significantly yet. At current prices, the share of GFCF to GDP, was at 28.8 percent in Q1 marginally less than the preceding quarter and much less compared with 2014-15 levels. Similarly, construction and services have shown a sequential dip in the growth. Will the higher growth sustain in the quarters ahead? The likely villains in the story will be higher crude oil prices, a weak rupee and widening fiscal deficit. However, a likely revival in the rural spending push will be welcome. Aditi Nayar, Principal economist at ICRA Rating agency believes so. “Rural sales appear to be on an improving trend, and the outlook remains favourable, driven by the revision in MSPs and the expected thrust on the agri-economy,” said Nayar in a note. The Q1 numbers gives enough for the NDA government to stay ahead of rivals in the growth debate at least till the Q2 numbers come. The GDP has been a hot subject for political debates particularly since Modi took over at the centre in 2014. Politicians are obsessed with debating just headline figures. But, assessing the economy by just GDP figures to discuss development could be misleading. Even when India is fast moving up in the rankings of GDP growth rate and often boasts of beating China, we are far behind in terms of per capita income at PPP and certain social development indicators such as poverty level and employment generation. The banking sector recapitalisation post-NPA clean-up and fresh round of credit flow to productive sectors is critical. India needs to work hard to strengthen its economy structurally, addressing the pain points, and look beyond the GDP numbers alone. Nevertheless, growth figures above 8 percent are encouraging; it brings positivity to the economic environment after a long period. (Data inputs by Kishor Kadam)