Q1 GDP print at 8.2%: Economic expansion to stay steady, but capital formation crux for future growth

The GDP growth rate for Q1-FY19 was always going to be a number that would be watched carefully. The reason is that there was considerable controversy stoked by the back series data of GDP for years preceding 2011-12 which then became a political issue. The fact that growth has come at 8.2 percent - yes, we have touched the magical number of 8 percent after quite a hiatus, makes the scenario look good. In fact, growth has far exceeded most forecasts which had kept it at less than 8 percent and more in the 7.5-8 percent range. Before going into the disaggregated numbers, it should be said upfront that the growth rate this quarter was going to be affected by the ‘base effect’, where growth was just 5.6 percent last year at this time. The reason for low growth was the Goods and Service Tax (GST) which was to be implemented from 1 July which made companies go in for destocking that finally was felt in the growth numbers. Over a low growth number, the growth for Q1-FY19 was going to come in higher though 8 percent plus was not really expected. Therefore when interpreting these numbers we need to be cautious to differentiate between ‘growth that is driving the sector’ and ‘growth which is a result of a low statistical number last year’. [caption id=“attachment_2183003” align=“alignleft” width=“380”] Representational image. Getty Images[/caption] This is important because while things look better this year, the level of enthusiasm looks slightly jaded given the environment typified by deficit monsoon, lower sowing of some crops, higher inflation, higher interest rates, a weaker rupee, fall in reserves, high crude oil prices, global trade wars etc. True, Forign Direct Investment (FDI) is up and Foreign Portfolio Investment (FPI) has turned positive and corporates have done well this quarter, which is promising. A balanced view is hence pragmatic here. Let us look at the numbers. Manufacturing is the leading sector with growth of 13.5 percent which comes over -1.8 percent last year. Quite clearly growth has been aided by a fall last year. While sectors such as auto, consumer durable goods, pharma etc. have done well, there have been statistical spikes in machinery, metals etc. But this growth has propelled the economy, which is positive. There would be more of such episodes in the coming quarters too. The government sector continues to drive the economy which is encouraging as the private sector activity is still to pick up adequately. In such a situation the government has tried its best to plug the gap, which has led to 9.9 percent growth on top of 13.5 percent last year. The question is whether this will be sustained during the year. It will depend a lot on how revenue grows because if the tax collections in particular along with disinvestment do not pick up, there could be cuts in spending on discretionary items and can affect growth. Therefore, the revenue flows become important here. Construction activity has done well at 8.7 percent which comes over a low base of 1.8 percent growth last year. But the capex of the government as well as some pick up in the private space has continued to this growth. This can be seen by the growth in cement and steel, where the core sector data also reveals that growth continues to be strong in July. There could be a revival post monsoon in Q3 and Q4. Agriculture performance has come in higher than expected at 5.3 percent and the contribution of allied activities cannot be ruled out as it contributes to 45 percent of output. This needs to be sustained as it will play a critical role in the year as rural demand emanates from this performance. Mining is probably a surprise as the coal sector has been doing well. Other segments like oil and other metals would be the factors driving the growth number downwards. Electricity, which is dependent on mining, had maintained the stable performance of 7.3 percent (7.1 percent last year). The services segments typified by trade, transport, hotels etc. and finance, real estate etc. are the ones which grew at lower rates this quarter. The banking sector has been pressurized under the asset quality issue which has affected business growth, while the performance of some of the service sector companies had come in lower which had kept growth in the 6.5-6.7 percent region. On the whole, the number of 8.2 percent is good to move to a number of 7.5 percent for the full year. It should be remembered that growth in FY18 had followed a curious pattern of 5.6 percent, 6.3 percent, 7 percent and 7.7 percent in the four quarters. With growth peaking now at 8.2 percent this time, the same base effect which propped up growth in Q1 can move to a slower growth path in the subsequent quarters. Therefore, while growth will stay steady, such a high growth number may not be expected especially from Q3 onwards. A component which merits attention is capital formation which has increased marginally from 28.7 to 28.8 percent. This has to increase consistently to assure that there is a turnaround in investment, and will be the crux for future growth perspectives. (The writer, chief economist, CARE Ratings, is author of ‘Economics of India: How to Fool all people for all times’)