What to expect from September quarter GDP growth numbers


The India GDP growth numbers for the September quarter are due to be released on the 30th of this month. Will GDP growth show an improvement over the dismal 5.7% growth notched up in the June quarter? How severe have been the teething troubles with the goods and services tax (GST)? Will there be signs of a pick-up in the construction sector, a key source of jobs for the masses? These are some of the questions the data will answer.

The first thing to note is that growth in gross value added (GVA) fell to 6.8% in the September 2016 quarter from 7.6% in the June 2016 quarter, so the favourable base effect should ensure a bounce in GVA growth for the September 2017 quarter. Similarly, GDP growth too will benefit, though by a smaller amount.

But there are other fundamental reasons for growth to pick up as well. Re-stocking by businesses after the initial disruption caused by GST at the end of the last quarter should boost consumption growth, aided and abetted by the early festive season this year.

For the September quarter, economists foresee GDP growth in the range of 6-6.2% led by incremental pick-up in industrial activity. High-frequency data indicates that the Index of Industrial Production, Purchasing Managers’ Index and exports had improved during the quarter and the early festival season this time aided consumption, they said.

Agriculture growth was a strong 4.1% in the September 2016 quarter, so it remains to be seen how it will do this time, particularly given the not-so-good news flow regarding this year’s kharif crop and the ongoing farmers’ agitation.

Government expenditure, which has supported growth, was weak in the September quarter. Growth in the “Trade, hotels, transport, storage and communication” segment was a very strong 11.1% in the June quarter and it’s likely we’ll see some moderation there.

But most importantly, private consumption will be closely watched. In a scenario of weak private investment activity and moderating government expenditure, any weakness in private consumption would be worrisome.

Trimming its real GVA growth forecast for 2017-18, the Reserve Bank of India (RBI) in its October 2017 policy report said, “Loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook.” The central bank revised its GVA growth estimate for the year down to 6.7% from the August 2017 projection of 7.3%.

“The implementation of GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short-term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates,” it further added.

Some economists are of the view the sequential recovery seen in second quarter corporate earnings would offset the impact of lower government expenditure and a somewhat disappointing kharif harvest, thus helping a sequential recovery in GVA growth in the September quarter. The latest RBI survey of professional forecasters, carried out in September, pegged GDP growth for the second quarter of FY18 at 6.5% (median estimates), while the median forecast of GVA growth for the quarter was 6.2%. Agriculture is expected to grow by 3%, industry 4% and services 7.9%, all median estimates. Note though that the RBI’s consumer confidence survey in September showed a slippage from the June quarter. The Industrial Outlook survey also showed a similar decline.

Upasna Bhardwaj, a senior economist at Kotak Mahindra Bank said, “As far as business confidence is concerned, the sentiment among large corporates seems to have improved more than that of MSMEs running into this quarter. This is expected to improve growth prospects in the months ahead. With the worst behind us, we expect GVA in 2HFY18 to be a tad above 7%.”

While economic growth may improve in Q2 aided by a consumption boost, the absence of private sector investments remains a key challenge. Unless that picks up significantly, a sustainable recovery is unlikely.

Finally, a word of warning about the GDP numbers. Economists point out that while large companies may have recovered from the disruption caused by GST and demonetisation, small enterprises operating in the large informal economy continue to suffer. Thus, an improvement in the official growth figures may not necessarily indicate that all is hunky-dory on the ground.