10 questions answered by Q3 GDP data
There’s a favourable base effect, because demonetisation lowered growth in the December 2016 quarter, but even so, India’s GDP growth has improved
These are the questions:
1) Is the economy recovering from the slowdown?
The numbers certainly show a pickup. Growth in gross value added (GVA) at constant prices is up 6.7% for the December 2017 quarter, well above the 6.2% growth in the three months ended September. Sure, there’s a favourable base effect, because demonetisation lowered growth in the December 2016 quarter, but even so, growth has improved.
That said, the economy is yet to achieve the growth rates it had before the twin blows of demonetisation and the introduction of the goods and services tax (GST). Real GVA growth in the three months ended September 2016, the quarter before demonetization, was 7.2%. But we’re getting there, slowly.
What’s more, private sector growth in real GVA, that is leaving out the government contribution via “public administration, defence and other services”, was at 6.6% year-on-year in the December 2017 quarter, a bit more than the 6.3% in the September quarter. The economy is growing even without government support.
2) Which sectors contributed how much to GVA growth?
The highest contribution came from the “Trade, hotels, transport, communication and services related to broadcasting” sector, which accounted for 24.7% of total year-on-year real GVA growth. Manufacturing contributed 20.7% and “Financial, real estate and professional services” 18.6%. Even the government sector contributed 14.1%, which is why, at the end of December 2017 the Union government’s fiscal deficit was already 113.6% of the budgeted figure for the full fiscal year. But the data does show that the recovery has been broad-based. Agriculture’s contribution was 12% and construction’s 8%.
3) Has the manufacturing sector recovered from the pain of GST introduction?
It certainly has—real GVA growth in manufacturing in the December quarter was 8.1%, well above the September quarter’s 6.9% and this was despite an unfavourable base effect. Of course, the strong growth was expected, as Centre for Monitoring Indian Economy data on corporate results shows year-on-year growth in net profits after exceptional items was 15.6% in the December quarter, compared to 2.35% in the September quarter. After a long time, we’re seeing a recovery in the manufacturing sector.
4) Has the slowdown in private services growth been overcome?
Yes, private sector services too are showing a pickup. Unfortunately, despite a very favourable base effect, the “Financial, real estate and professional services” sector saw tepid growth, no doubt weighed down by the problems in the real estate sector. The growth rate has slowed in the “Trade, hotels, transport, communication and services related to broadcasting”. The construction sector, however, has seen a smart pickup in growth.
5) What implications does the GDP data have about job growth?
The rise in growth in the construction sector to 6.8% is very good news, as it is one of the main sources of jobs for the masses. Similarly, the better-than-expected growth of 4.1% for agriculture is also good news, especially in view of widespread reports of rural distress. The only worry is that, as Madan Sabnavis, chief economist at CARE Ratings Ltd, says, “The present revelation of high fiscal deficit up to January could be a risk factor in terms of continued support for construction.”
6) Has investment growth gained momentum?
Real growth in gross fixed capital formation has been an astonishing 12% year-on-year, up from 6.9% in the September quarter. This column had said that a rise in corporate new orders had pointed to increased brownfield investment.
The rise in investment demand, if it holds, is very good news, as investment in fixed assets is essential for a sustainable recovery.
7) How has private consumption growth fared?
Real growth in private final consumption expenditure has slowed to 5.5% in the December quarter, from 6.6% in the September quarter. That this has happened despite the pickup in the farm sector and in manufacturing is a concern.
8) Has the external sector been a drag on growth?
The trade deficit jumped in the December 2017 quarter. Export growth was 2.5%, while imports were up 8.7%, in real terms. The widening trade deficit is perhaps the single biggest concern for the Indian economy at the moment.
It isn’t clear, for instance, why exports haven’t grown much despite the rebound in global trade. On the other hand, as IndusInd Bank Ltd chief economist Gaurav Kapur points out, clearly domestic consumption is leaking into imports. Perhaps that is why the government raised import duties on a variety of items in the latest budget.
9) What do the GDP numbers mean for the markets?
In the currency markets, the widening trade deficit is adding to pressures for a lower rupee. This will likely be reinforced by lower portfolio flows into India, as well as a tightening of monetary policy in the US.
The bond markets will see the confirmation of the recovery as buttressing the case for firmer interest rates. However, this is more or less baked into bond yields, which have already gone up sharply.
The better-than-expected GDP print will be welcomed by the stock markets, although they are at the moment bogged down by the fallout of the Punjab National Bank fraud.
10) What implications does this have for monetary policy?
The news of the ongoing recovery and especially the improvement in investment demand will be welcomed by the monetary policy committee, which had been worried about growth. The Reserve Bank of India had projected GVA growth at 6.6% for 2017-18, which is not very different from the Central Statistics Office’s estimate of 6.4%. The central bank can therefore lay its growth concerns to rest and focus instead on inflation.
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