A closer look at Q1 GDP data numbers announced last Friday shows some interesting trends:

1. It’s much ado about nothing

To counter the base effect, as well as look through the impact of demonetisation and the introduction of the goods and services tax (GST), let’s take the compound annual growth rate (CAGR) of gross value added (GVA) over the last two years instead of looking at year-on-year growth.

What we then find is that the CAGR has been remarkably stable. For instance, the CAGR over June 2016 to June 2018 is 6.75%. From March 2016 to March 2018, it was 6.78%. And between December 2015 and December 2017 it was 6.76%. Please see the accompanying chart 1.

This is a more level-headed way of looking at the numbers and it takes away the dramatic ups and downs. What it also suggests is that, shorn of the hoopla, the 8% GVA growth rate in Q1 is nothing to get excited about.

2. The drag on growth from the external sector will get worse

One big reason for the 8.2% Q1 GDP growth was the base effect of the external sector. Simply put, while the trade deficit in the June 2018 quarter was very high, so was the deficit in the year-ago quarter, which is why the drag on growth from the external sector was low. The drag was 4.6% of GDP in Q1, compared to 19% in the March 2018 quarter and 15.6% in the December 2017 quarter. Please see the accompanying chart 2.

That means, given that the base effect from the external sector will be unfavourable in future quarters, growth will be hit. There is also a larger problem. If the trade deficit is already so high, how much can it bloat when investment demand picks up fully? The solution: Allow the rupee to depreciate.

3. The GVA deflator shows worsening terms of trade for the farm sector

What is inflation according to the GVA deflator among the various sectors? While overall inflation according to the GVA deflator was 4.8% in the June quarter, inflation in ‘agriculture, forestry and fishing’ according to this yardstick was a mere 1.4%. That’s on top of deflation of 2.7% in the June 2017 quarter. This is a sign of the much-talked-about rural distress.

The chart shows the inflation in other sectors according to the GVA deflator. Note the high inflation in the mining and the relatively high inflation in utilities and the ‘financial, real estate and professional services’ sector. Clearly, as IndusInd Bank economist Gaurav Kapur points out, the terms of trade have moved against agriculture.

Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at manas.c@livemint.com