Government spending and unsold goods contributed 61% of the year-on-year (y-o-y) growth in gross domestic product (GDP) in the December quarter.
The government’s final consumption expenditure contributed as much as 42% to the y-o-y growth in GDP at market prices, less discrepancies.
In contrast, the contribution of gross fixed capital formation was lower, at 33%. Here’s the contribution of the other items: private consumption expenditure 64%; imports less exports -56%; changes in stocks 19% and changes in valuables -2%.
The change in inventory was high, implying unsold stocks. Inventories rose by a huge 101% compared with the level at the end of the previous quarter. That indicates a part of the GDP growth is illusory.
Also See Illusionary Growth (Graphic)
The surprise was mainly due to the dismal figures for agriculture.
The government’s advance estimates of growth for the full year, made a few weeks ago, had implied a growth rate of 2.4% for agriculture in the second half of the year.
If agriculture had grown at that rate in the December quarter, the GDP growth rate would have been 6.3%, higher than what the market was expecting.
Some analysts said the contraction in agriculture was the result of a statistical quirk and Abheek Barua, chief economist at HDFC Bank Ltd, says reports on the ground indicate farm growth is likely to bounce back in the next quarter.
Looking at the break-up of GDP growth by sectors, the y-o-y growth in GDP at factor cost is due to growth in the services secor, including construction.
Here are the numbers: growth in services 106% of incremental GDP at factor cost, growth in manufacturing remains flat, growth in mining 2% of incremental GDP, growth in electricity, water, etc., 1% and agriculture declines by 9%.
Within services, growth in community, social and personal services (mainly government pay) totalled 38% of incremental GDP growth.
The key question: Is GDP growth going to get better in the March quarter?
It’s true that the liquidity crisis of the last quarter has been overcome and the ABN Amro Purchasing Managers’ Index seems to show higher growth in manufacturing. But export growth could turn negative and it remains to be seen whether government consumption expenditure can continue to grow so rapidly.
For how long can services carry the burden of the entire GDP growth?
Both construction and real estate growth are expected to decelerate. Also, the December manufacturing data had shown a slowdown in consumption. Bank lending contracted in January and although it has since picked up, de-stocking by firms is continuing.
Even if agriculture turns around, growth in the March quarter is likely be only slightly better than the previous quarter.
It’s obvious that a monetary boost is sorely needed.
Graphics by Paras Jain / Mint
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