Opinion | June quarter GDP growth: beware the base effect
GDP growth will get a considerable boost due to the low base in June 2017 quarter
The gross domestic product (GDP) data for the June quarter will be released on Friday. What can we glean from the numbers?
The first thing to do when considering the figures is to get the base effect out of the way. Growth will get a considerable boost due to the low base in the June 2017 quarter, because of the distortions created during the run-up to the introduction of the goods and services tax (GST).
Here are the numbers. GDP growth at constant prices during the March 2018 quarter was 7.7%, which came on top of 6.1% growth during the March 2017 quarter. But growth had dipped to 5.6% in the June 2017 quarter—the lowest rate of growth since the March 2014 quarter. GDP growth should therefore be, at the very least, more than 7.7% in the June 2018 quarter if we are to say that it hasn’t lost momentum.
That said, this favourable base effect isn’t uniform across all sectors. While overall growth in gross value added (GVA) will gain from a low base, growth in the services sector actually picked up from 6.3% in March 2017 to 9.5% in the June 2017 quarter. So growth for the services sector in the June 2018 quarter will in fact have an unfavourable base effect. This is true of all services sectors except “public administration, defence and other services”.
For example, “financial services, real estate and professional services” grew at 5% in the March 2018 quarter over growth of 1% in the March 2017 quarter. Will it be able to grow at the same pace in the June 2018 quarter, when growth in this sector had moved up to 8.4% in the base June 2017 quarter?
Agriculture and industry, on the other hand, will gain from a lower base and this is especially true of the mining and quarrying sector. The manufacturing GVA grew by 9.1% in the March 2018 quarter, on top of 6.1% growth in the year ago period. Since growth in the June 2017 quarter had contracted by 1.8%, the sector should show very strong growth in the June 2018 quarter.
In short, very high growth in industry or very low growth in services should be viewed with caution, keeping the base effect in mind.
This is true for the GDP data from the expenditure side as well. Growth in private final consumption expenditure, at constant prices, was much higher in June 2017 than in March 2017. This will, therefore, limit private consumption growth in the June 2018 quarter.
On the other hand, gross fixed capital formation will benefit substantially from a lower base.
We already know that quarterly earnings for the corporate sector have shown decent growth, but this too has been aided by the base effect. CMIE (Centre for Monitoring Indian Economy) numbers show that, in a sample of 3,217 non-financial companies, profits after tax and exceptional items went up 34.5% year-on-year in the June 2018 quarter, compared to 1.8% growth in the March quarter.
But while the March 2018 quarter numbers were on top of 4.5% growth in the March 2017 quarter, the June 2017 quarter saw a 23.4% contraction in net profits. Once again, the base effect has worked its magic.
A closer look shows differences in growth between sectors. While corporate sector data show that manufacturing companies did very well in the June quarter, results from the non-financial services sector show a decline in year-on-year growth when compared to the March quarter. While profits from trade are up, the other service sectors indicate slowing growth. There has, however, been an improvement in the construction and real estate sector.
What we need to look at is whether GVA/GDP growth in different sectors have moved up in spite of adverse base effects—for instance in the services sector. To give another instance, we need to check whether anecdotal evidence of a rise in consumption is reflected in consumption growth overcoming the higher base effect.
Once we see through the base effect, what should we look for? Whether investment demand has picked up, whether the drag from the external headwinds is increasing and whether growth is becoming more broad-based.
Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at email@example.com
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