Investment demand contributed almost half of the year-on-year (y-o-y) growth in the gross domestic product (GDP) during the March quarter. Gross fixed capital formation accounted for 48.8% of the total y-o-y growth of GDP at market prices (at 2004-05 prices) for the March quarter (not taking discrepancies into account).

The next biggest source of growth was the external sector, with exports less imports contributing to a large 34% of annual growth. Private final consumption expenditure accounted for 12.4% of the growth, while government final consumption expenditure accounted for a low 2.2%. The contribution of various sources of growth to overall y-o-y GDP growth is shown in the chart.

Graphic: Yogesh Kumar/Mint

But the biggest change has occurred in the external sector, because exports less imports accounted for a mere 0.4% of the growth in GDP during the December quarter and the jump in the March quarter has been substantial. It’s clear that the revival in exports, combined with a lower import bill helped buoy GDP during the March quarter.

As a matter of fact, real imports (at 2004-05 prices) were lower in the March quarter than in the year-ago period, which suggests that the growth in imports shown by the commerce ministry data every month is largely a price effect, rather than due to higher volumes.

The headline GDP growth number has been on expected lines and this column had said on Monday that we could expect a shift in the drivers of growth from consumption to investment demand. Nevertheless, the very low y-o-y growth of 2.6% in private consumption is a negative surprise.

Also, while manufacturing growth was expected to be very good, the growth in services, at 8.4% y-o-y, has been far below that for manufacturing, which is up a huge 16.3%.

The transition from government stimulus to private demand has been successfully made. Looking ahead, investment demand should continue to be robust as companies add capacity. A good monsoon will give a fillip to agriculture and should revive consumption demand.

It’s also likely that the boost given by the external sector will continue because of the low export base, although much depends on avoiding a double dip overseas, especially in Europe.

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