Growth in gross value-added (GVA) at constant prices for the June 2017 quarter has been disappointing, coming in at 5.6% year-on-year, the same rate as in the March quarter. But it’s worse than it looks, because the base effect should have boosted growth in the June quarter. In the March quarter, the 5.6% growth was on top of 8.65% growth in the year-ago quarter, whereas the 5.6% growth in the June quarter was on top of 7.56% growth in the year-ago quarter. The base this time was much lower.

GDP (gross domestic product) growth for the June quarter at constant prices was 5.7%, lower than the 6.1% notched up in the March quarter. The last time we saw such slow growth was in the March 2014 quarter. Moreover, growth received a massive boost from government consumption spending, which accounted for over a third of the year-on-year growth in GDP (see Chart 1). Shorn of government consumption, GDP growth in the June quarter was a mere 4.3%.

As usual, the biggest contributor to growth was private consumption. But private consumption growth was 6.7% year-on-year, down from 7.3% growth in the March quarter. Consumption growth has been coming down.

Growth in gross capital formation was a pathetic 1.6% year-on-year in the June 2017 quarter. There is no sign of a revival in investment demand. The external sector pulled down growth, with imports being much higher than exports.

Very surprisingly, “valuables" or expenditure on gold and jewellery, contributed as much as 42.2% to growth in the June quarter. This is markedly at variance with the narrative of a shift in household assets from gold to financial instruments. If the data is right—a big if—the combination of government consumption and spending on valuables was what held up GDP growth in the June quarter.

Also surprising was the increase in stocks during the quarter, after all the talk of destocking as a result of the goods and services tax (GST).

In short, the expenditure side data shows private consumption growth sputtering, non-existent growth in capex and faltering exports. Or alternatively, as IndusInd Bank chief economist Gaurav Kapur points out, consumption is increasingly going into imports.

Chart 2 shows the contribution of various sectors to growth in GVA. Over four-fifths of the growth in the June quarter has been on account of the services sector. Growth in industry has fallen sharply from 5.5% in the March quarter to 1.47% in the June quarter, the lowest in five years.

Services growth on the other hand has been 7.8%, compared to 5.7% in the March quarter (services here includes the construction sector). The good thing is that the non-farm, non-government sector has grown faster than in the March quarter. That, says Kapur, shows the effect of remonetization. The other, rather faint, silver lining is that the construction sector grew by 2% year-on-year, which may not be much, but is at least better than the contraction in the March quarter. The government’s focus on capital expenditure, especially on roads, seems to be showing up here.

True, the June quarter has been affected by the introduction of GST, especially in the manufacturing sector. But the data shows the slowdown has been much worse than anticipated.

What of the future? The Reserve Bank of India’s fears of low growth have come true and, provided inflation remains benign, another rate cut is likely. Whether that will do much good is another matter.

The Composite Purchasing Managers’ Index (PMI) in July showed a contraction in private sector activity from the previous month. PMI for August will let us know whether things are getting better. But it is doubtful if the government can continue to spend at the same pace. Very likely, we’ll have to wait for the second half of the year to see the GST effect wearing off.

Bonds should be enthused by the low growth and the hope of a rate cut. For the stock markets, though, it’s time to put aside the party hats.