The gross domestic product (GDP) data for the first quarter of the current fiscal year was supposed to provide answers to the following questions: 1) Has private consumption bounced back? 2) Does investment demand continue to be strong? and 3) Is the economy still dependent on government stimulus?
The simple answer is: Private consumption and investment demand growth is weaker than in previous quarters and growth in government consumption is running out of steam. What’s more, as much as 50.5% of the year-on-year (y-o-y) growth in GDP came from the trade surplus, a consequence of falling imports.
The y-o-y growth rate for private final consumption expenditure was a mere 1.6% in the June quarter, a rate of growth well below consumption growth rates in the December 2008 and March quarters.
Clearly, despite the low interest rates and the stimulus, private consumption demand remains weak.
Investment demand is slightly more robust, with a y-o-y growth rate of 4.2% for gross fixed capital formation. But even this growth rate is lower than that notched up in the December 2008 and March quarters.
Graphics: Ahmed Raza Khan / Mint
Government consumption demand growth was a strong 10.2% y-o-y. Nevertheless, as the chart shows, this growth rate was sharply lower than in the December 2008 and March quarters.
But if rates of growth of private final consumption expenditure, government consumption expenditure and gross fixed capital formation were all lower than the y-o-y growth rate in the March quarter, how is it that overall GDP growth in the June quarter at 6.1% was higher than the March quarter’s 5.8%?
There were two big reasons.
One, exports were more than imports in the June quarter, the first time in many quarters. That was not because exports did well, but because the contraction in imports was much more than the contraction in exports, due to the slowdown and due to lower oil prices. But because the trade balance (exports minus imports) was positive in the June quarter and negative in the year ago period, the contribution of the external sector to total GDP was much more in the June quarter than in the previous quarters.
The second reason was that discrepancies in the data had a smaller negative impact on growth in the June quarter.
Looking at the data another way, the total y-o-y increase in GDP at market prices (at constant 1999-2000 prices) in the June quarter was Rs49,858 crore. At least 50.5% of that growth was contributed by growth in the trade balance (exports minus imports). Growth in gross fixed capital formation contributed 22.4% to the GDP increase, government expenditure 16.4% and private consumption 15.8%, while discrepancies contributed a negative 10.4%. In short, it’s clearly the positive contribution of the trade balance during the quarter that boosted growth. And depressed growth in imports was the key reason for that positive contribution.
Looking ahead, consumption could be hit further by the weak monsoon and the rise in oil prices will mean that the positive trade balance may not last. On the other hand, the sharp rise in external commercial borrowings in June and July show that capital expenditure is on the rise. The saving grace is that the weak consumption and investment growth should postpone any decision by the central bank to tighten monetary policy.
Write to us at firstname.lastname@example.org