More than half the growth in gross domestic product in the June quarter came from two broad segments of the economy: financing, insurance, real estate and business services; and community, social and personal services. As chart 1 shows, these two sectors contributed as much as 58.6% of the year-on-year expansion in the economy. The financial sector has been a great support to the overall economy even during the depths of the slowdown; so, its predominance in economic growth is not unexpected. Indeed, this sector alone accounted for more than half the GDP growth in the March quarter. What’s encouraging, therefore, is that other sectors have improved their share. This is true particularly for manufacturing, which contributed 9.2% of the growth, after a long period during which it contracted. But let’s not get carried away: value added in manufacturing was a mere 1.2% higher than what it was three years ago. And the fact that one-fifth of GDP growth was contributed by community, social and personal services, which is mainly government spending, underlines the fragility of the recovery.
Of course, the industrial numbers were already available from the IIP data, so they aren’t a surprise. The data for services is, therefore, more interesting. Overall, the services sector (not taking construction into account) grew by 6.8% in the June quarter, less than the 7.2% growth it notched up a year ago. The construction sector, however, did much better than last year.
What about the GDP figures from the expenditure side? We have to take these numbers with large doses of salt, not least because the figure under the heading “discrepancies" accounted for 3% of total GDP at market prices in the June 2014 quarter, in contrast to the June 2013 quarter, when it was negligible. It’s also worth noting that, unlike what happens usually, this time there has been no revision of the numbers in the year-ago quarter, which suggests that either the Central Statistical Organisation has suddenly become super-efficient, or that it hasn’t thought it fit to include the revised estimates at present. Not one of the figures, both on the factor cost and on the expenditure side, has been revised, which is a big surprise.
Nevertheless, taking the numbers such as they are and excluding “discrepancies", the contribution of private consumption expenditure to growth in the June quarter is the largest, at 39.8%. Including government consumption, the contribution of total consumption to growth goes up to 51.9%. More than half of the growth, therefore, is due to higher consumption. Another 34% comes from the external sector, or exports less imports. Import growth has been lower than in the June 2013 quarter, while export growth has been slightly higher and together, the contribution of the external sector has been considerable. It’s also worth noting that gross fixed capital formation accounted for 25.9% of the growth during the quarter, which seems to indicate a revival of investment demand. But while that contribution seems large, remember that gross fixed capital formation in the June 2014 quarter was still a bit lower than what it was in the June 2011 quarter, or three years ago. The other notable feature of the expenditure side GDP numbers was the negative 12.3% contribution of the “valuables" segment, as investment in gold came down.
But while GDP growth accelerated sharply in the June quarter, inflation too went up. RBS economist Gaurav Kapur points out that the GDP deflator measure of inflation was at 5.84% in the June quarter, up not only from the 5.33% inflation in the preceding March quarter, but also higher than inflation of 5.67% in the June 2013 quarter. That will not be welcome news for Reserve Bank of India. The details of inflation computed using the GDP deflator for the overall economy as well as for the various sectors are given in chart 2. The rise in inflation underlines the need for both a revival of investment demand and supply-side reforms, if higher growth is not to be accompanied by higher inflation.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments and feedback are welcome at