Economic growth accelerated in the fourth quarter (Q4) of FY18, but much of it is due to a favourable base effect. True, gross value added (GVA) increased by 7.6% at constant prices in Q4 compared to 6.6% in Q3. But growth in Q3 was on top of 6.9% growth in the year-ago quarter, while growth in Q4 was on top of much lower 6% growth in the March 2017 quarter, a period severely affected by demonetisation.

Also, much of the growth was due to government expenditure—the “public administration, defence and other services" sector. Indeed, the non-farm private sector growth, at constant prices, was 7.2% in Q4 of FY18, lower than the 7.4% growth notched up in Q3. The government’s push to growth was also seen in the GDP figures on the expenditure side, with Government Final Consumption Expenditure going up by a massive 16.8% year-on-year. It does look as if the government deficits (including that of the states) for FY18 will be overshot.

Almost all sectors—agriculture, manufacturing, trade, finance and construction—had the benefit of a lower base. What stands out in the Q4 GVA numbers though is that the “Trade, hotels, transport and communication etc" sector and the “financial, real estate and professional services" sector both saw lower growth in Q4, despite a favourable base effect. IndusInd Bank Ltd chief economist Gaurav Kapur points out that growth in the private services sector (including construction) fell to 7.3% in Q4 from 8.1% in Q3. True, the construction sector grew by 11.5%, but much of that high growth was because the sector saw a contraction of 3.9% in the year-ago quarter. In contrast, government services saw good growth. It’s apparent that the services sector hasn’t yet recovered from the blows inflicted by the introduction of the goods and services tax.

The good news is in industry, which is at long last seeing a recovery, with growth in manufacturing, mining, and electricity and other utilities picking up. This is buttressed by the expenditure side figures for gross capital formation, which show a jump in growth to 14.4%. Investment demand is back with a bang, although a large chunk of that is driven by government spending.

There is one curious feature about the data. While GDP growth at current prices has decelerated from 11% in Q3 FY18 to 10.9% in Q4, GDP growth at constant prices has gone up from 7% to 7.7%. The GVA numbers show a similar trend, with GVA growth at current prices being 10.7% both in Q3 and Q4, while GVA growth at constant prices increased from 6.6% to 7.6%. The reason is probably the fall in food prices, which lowered the deflator for agriculture. This suggests that the deflationary tendencies in agriculture brought about by demonetisation haven’t ebbed yet and bumper harvests have added fuel to the fire.

Lastly, the data shows a substantial drag on GDP growth due to the external sector—simply put, export growth is much slower than import growth. With crude oil prices remaining high and with manufacturing growth picking up, this deficit is likely to get worse.

In short, while the headline growth numbers look impressive, the details are less rosy.