June quarter GDP growth below expectations at 7.1%


India’s gross domestic product (GDP) grew below expectations at a five-quarter low of 7.1 per cent in the first three months of 2016-17, down from 7.9 per cent in the fourth quarter of the previous financial year.  The growth was pulled down by agriculture, mining and quarrying as well as the construction sector. GDP had grown 7.5 per cent in April-June (Q1) 2015-16.

However, the government was confident that the growth would be close to 8 per cent in the current financial year on good monsoon, implementation of the seventh pay commission recommendations and various structural reform measures taken by it against 7.6 per cent registered in 2015-16. Experts, on the other hand, said  that moderation in growth would put pressure on RBI governor-designate Urjit Patel to cut the policy rate.

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Apart from the growth concerns, gross fixed capital formation (GFCF),  which connotes investment, contracted for a second straight quarter at 3.1 per cent, showed official figures released on Wednesday. It had declined 1.9 per cent in Q4FY16.  In fact, experts pointed out that the growth was primarily consumption-led and hence highly imbalance.

Seen in conjunction with the eight-month decline in the capital goods segment in the Index of Industrial Production (IIP), the outlook for an investment revival looks dim. India Ratings and Research had said despite several initiatives taken by the government to revive investments, “it has failed to rekindle animal spirits in the economy”.

Headline GDP growth in the first quarter was driven by a strong manufacturing sector, which grew at an impressive 9.1 per cent. Growth was pushed up by the private sector which, based on data of listed companies, grew at a staggering 11.9 per cent (current prices) as opposed to 5.5 per cent the year before. The segment has a 75 per cent share in the manufacturing sector.

This suggested that the full effect of higher commodity prices has still not played out. ICRA said in a research note: “… growth in earnings has been higher than revenue growth as well as the volume trend revealed by the IIP, supporting the robust rise in the manufacturing GVA during the just-concluded quarter.”

But the sector’s overall growth was dragged down by the quasi-corporate and unorganised sectors, which — according to IIP data — contracted by 0.7 per cent in the first quarter.  Compared to the manufacturing sector, gross value added (GVA) by the mining & quarrying sector was weaker than that observed in IIP. Mining and quarrying sector contracted by 0.4 per cent against 8.5 per cent in Q1 2015-16, while electricity, gas, water supply and other utility services grew 9.4 per cent against 4.0 per cent in Q1 2015-16

Growth was also pushed up the public administration, defence and other services segment which largely connotes government expenditure. GVA of the sector grew 12.3 per cent against 5.9 per cent in Q1 2015-16.

On the expenditure side, government consumption expenditure is up 18 per cent in Q1 FY17, after a marginal contraction the year before. Private final consumption grew at a slower pace of 6.7 per cent against 6.9 per cent the year before.

Private consumption is expected to pick up towards the beginning of the third quarter as good monsoon was likely to boost rural demand. The impact of the Pay Commission award could also add to the consumption boost.

Gross value added by the agricultural and allied activities sector grew at a mere 1.8 per cent in Q1 FY17, from 2.6 per cent the year before. An explanation for lower crop production could be agricultural growth only captures production during the fag end of the rabi crop. The much-awaited monsoon effect will only be visible towards the beginning of the third quarter.

Construction also showed signs of weakness, growing at a mere 1.5 per cent in Q1 FY17, down from 5.6 per cent in Q1 FY16. This is surprising considering that both steel and cement which are major inputs in the sector have actually grown at a faster pace in the current financial year than in the previous one. Steel grew at 3.8 per cent in Q1FY17, up from 2.1 per cent in Q1Fy16, while cement grew at 5.7 per cent, up from 1.4 per cent over the same period. It is possible that growth has been adjusted downward as consumption of finished steel declined to 0.3 per cent in Q1Fy17, down from 5.6 per cent the year before.

Perhaps anticipating lackluster growth of the sector, the government today separately moved to ease the sectors woes. It has eased rules to ensure quicker arbitration in the sector. It has also sanctioned that 75  per cent of the disputed amount be deposited by thegovernment agency  concerned to private players so that work can continue.

In the services sector, GVA by trade, hotels, transport, communication and services sectors grew 8.1 per cent against 10.0 per cent in Q1 2015-16. While passenger movement and cargo at major ports registered an upswing, growth was lower. GVA by the financial, insurance, real estate and professional services sectors grew 9.4 per cent against 9.3 per cent in Q1 2015-16.

Data released by the Central Statistical Commission showed that GVA at basic prices grew 7.3 per cent in the first quarter. This suggested that subsidies in the first quarter grew at a faster pace than indirect taxes.

“The main reason for that (slowdown) is about 53 per cent higher subsidy expenditure,”  economic affairs secretary Shaktikanta Das said.

That is mainly because from Q1 itself, the government has started releasing subsidy allocations to the food, petroleum and fertiliser side, he said.

Das said,” given the good monsoon which we had this year, the 7th Pay Commission payout effect and various structural reform measures which the government has taken we expect the growth to be higher than what we achieved last year (7.6 per cent), perhaps close to 8 per cent.”

Firat Unlu, lead analyst(India), The Economist Intelligence Unit, said the weak GDP print will mark a first test for the incoming RBI governor, Urjit Patel.

“Calls for a rate cut will strengthen, and he will be under pressure to take an easier line on the struggling banking sector,” he said.

Unlu said the weakness in private sector investment will put the onus on the government to recapitalise the banks quickly. “This is more important than meeting short-term budget deficit targets,” he added.

India’s growth profile is unbalanced, with consumers doing all the heavy lifting, he said.