India’s Q1 GDP growth slows to 7.1% in new worry for Modi government

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NEW DELHI: India‘s economy grew at its slowest pace in five quarters in the April-June period, falling below expectations amid sluggish investment and farm output. That dents the prospects of hitting the 8 per cent mark for the full financial year but the government is hopeful that a bountiful monsoon and increased pay and pensions along with various structural reforms could still take growth closer to that figure.

Gross domestic product (GDP) rose 7.1 per cent in the first quarter, reaffirming India’s position as the world’s fastest-growing major economy, but sharply lower than 7.9 per cent in the January-March period, data released by the statistics office showed.

An ET survey of economists had seen June quarter growth at a median 7.4 per cent.

“Going forward, one would expect growth to be higher than last year and perhaps close to 8 per cent,” said Economic Affairs Secretary Shaktikanta Das. GDP growth in FY16 was 7.6 per cent, ahead of China, while it grew 7.5 per cent in the first quarter last year.

India needs to grow at 8 per cent and more for several years in order to generate jobs, raise incomes and lift millions out of poverty. The latest GDP numbers will put pressure on Urjit Patel, who succeeds Raghuram Rajan as Reserve Bank of India governor next month, over whether to raise interest rates in the October 4 monetary policy announcement amid possible inflationary pressures.

 

Gross value added (GVA), which is adjusted for subsidies and taxes to arrive at GDP, grew at an improved 7.3 per cent, almost matching 7.4 per cent in the previous quarter, giving the numbers some lustre.

“In so far as this number is concerned, GVA growth is marginally better than last year and this is before the good monsoon kicks in,” said Chief Statistician TCA Anant. “So, we are seeing a strong production economy. The GDP number shows a high subsidy outgo in this quarter and how it pans out going ahead depends on government expenditure for the rest of the year.”

The April-July fiscal deficit was at 73.7 per cent of Budget estimates, only slightly higher than 69.3 per cent at the same time last year.

“Pace of growth is slow, acceleration in growth will not happen till there are structural reforms,” said Sunil Kumar Sinha, principal economist, India Ratings & Research, a Fitch Group company. “The first two quarters will not be great but the last two will get better for higher growth but not 8 per cent.”

Some so-called high-speed indicators suggest an improvement in the coming months. The purchasing managers’ index for both services and manufacturing inched up in July, and car sales are likely to continue to grow at over 10 per cent.

Rajan said earlier this week that a rate cut was possible if inflation slows. Consumer inflation crossed 6 per cent in July, breaching the limits set by the monetary policy framework — 4 per cent for the next five years with a 2 percentage point margin on either side.

Investments stall
Gross fixed capital formation (GFCF), a measure of investment, fell 3.1 per cent in real terms in the April-June quarter, suggesting private investment sentiment remains weak. Based on current prices, this measure declined 1.1 per cent, suggesting that the government’s efforts to revive stalled projects, clean up banks and boost public investment have not yet galvanised private investment.

“The key concern is with regard to gross capital formation, that is mainly the investment side. We have to look into the reasons,” Das said, adding it will improve going ahead.

Consumption is driving the economy in the absence of investment. “GFCF has declined and that is a cause of worry,” said Crisil chief economist DK Joshi. “It is consumption which is holding growth above 7 per cent.”

The construction sector, closely aligned with investment activity, also performed poorly, growing 1.5 per cent in the June quarter. Low capacity utilisation, excessive debt and bad loans at banks have held up revival in private investment.

Manufacturing support
The good news was high manufacturing growth of 9.1 per cent in the first quarter, suggesting the ‘Make in India’ initiative was making headway. This is the fourth successive quarter of 9 per cent-plus manufacturing growth.

The services sector grew 9.6 per cent, led by a 12.3 per cent rise in public spending and a 9.4 per cent increase in financial services and related sectors.

Monsoon boost awaited
Farm sector output rose 1.8 per cent in the June quarter, reflecting the lingering effects of two drought years. Rain in the June-September monsoon this year has been 97 per cent of the long-term average with most regions enjoying normal precipitation.

This is expected to boost sentiment and improve rural consumption, adding to the robust urban demand that is set to get a boost from higher salaries for government staff stemming from the seventh pay commission award.

Central government employees received higher salaries and arrears for the past seven months along with their August pay packet on Wednesday.

Citi expects rural consumption to surge $80 billion in FY17 because of the good monsoon, which will lift GDP growth by 0.7-1percentage point, it estimated. The latest data show a 4.6 per cent rise in area sown by farmers.

Though the first-quarter numbers showed moderation, the Federation of Indian Chambers of Commerce & Industry expects the year to end with a 7.8 per cent growth rate.