New Delhi: India’s economic growth accelerated to 7.4% in the second quarter of the current financial year, riding on a spike in industrial activity and pick up in investment demand.

However, sectoral data reveal that this growth is not uniform, with the growth in construction plunging and agriculture reeling under the impact of two back-to-back weak monsoons.

If the current acceleration in growth sustains, then it suggests a revival, something that is likely to be a key input when Reserve Bank of India (RBI) takes a call on interest rates at its meeting on Tuesday. Recent surveys are indicating a pick-up in business and consumer sentiment, which only reinforce perceptions of a revival.

The government projects growth to be above 7.5% in 2015-16 while most economists expect growth at 7.3-7.5%. In 2014-15, the economy grew 7.3%.

In the quarter ended 30 September, the gross domestic product (GDP) growth picked up by 7.4% against 7% in the first quarter (April-June). Both Bloomberg and Reuters polls had suggested that the economy would grow at 7.3% in the second quarter.

India’s growth overtook that of China, which grew by 6.9% in the second quarter.

To be sure, the Chinese economy at $10.4 trillion is little over five times the size of the Indian economy estimated at $1.9 trillion in 2014-15.

Regardless, the acceleration in the second quarter should boost the government’s confidence, especially with respect to the strategy of development it has pursued—kick-starting projects in limbo in the short run and creating a domestic manufacturing base in the long term.

The economic affairs secretary Shaktikanta Das said as much in a tweet: “Manufacturing growth at 9.3% in Q2 important growth driver. Will continue to work for bigger success of Make in India."

Crisil Ltd’s chief economist D.K. Joshi said that RBI is likely to hold rates at its current level and unlikely to take a call based on the GDP data.

“What happens in the budget and how the government implements the Seventh Pay Commission recommendations will be more important to RBI. I believe RBI will hold rates until the budget in February," he added.

Joshi, however, said the data is surprising because GDP deflator has fallen into the negative zone, indicating a deflationary scenario, while in the real economy, there is no deflation. “Nominal GDP coming below the real GDP was a surprise. The impact of wholesale price deflation has started to overshadow the retail price inflation. If this trend continues, it may make the fiscal deficit and current account deficit numbers look slightly worse than expected," Joshi added.

Nominal GDP in the second quarter grew at 6% as wholesale price index (WPI)-based inflation remained in the negative zone while real GDP grew 7.4%. Deflation is the opposite of inflation where actual prices start falling from their level a year ago.

Yes Bank Ltd’s chief economist Shubhada Rao said that the government needs to continuously push ahead with reforms to drive private investment and domestic demand. “Gradual implementation of structural reforms, the subdued inflation, superior quality of fiscal spending and lagged response to policy rate cuts are likely to be important growth boosters for India, going forward," she added.

The details

During the second quarter, manufacturing and electricity growth picked up by 9.3% and 6.7%, respectively, against 7.2% and 3.2% in the first quarter. Construction, and trade, hotel and transport sectors slowed to 2.6% and 10.6% respectively.

The large dip in construction activities came as a surprise, despite significant push in road construction by the government. This could be because the Central Statistical Office derives its growth for construction from production of cement and consumption of finished steel which registered tepid growth at 1.6% and 1.2% respectively.

The farm sector grew 2.2%, faster than 1.9% in the first quarter, despite a 15% drop in monsoon rains, because about 51% of value-addition in the sector now comes from livestock products such as forestry and fisheries that registered a combined growth of more than 6% during the second quarter.

While the growth of “trade, hotels, transport and communication" was somewhat lean in its off-season (10.6%), other components of services, such as “finance, real estate and professional services" (9.7%) along with public administration representing government expenditure (4.7%), did the heavy lifting.

Investment demand

Growth in the second quarter was more investment-driven than consumption-led.

Gross fixed capital formation (GFCF), which represents overall investment demand in the economy, picked up to a five-quarter high of 6.8%,signalling an investment revival.

But surprisingly, private consumption demand fell to a three-quarter low at 8.3% in the September quarter. A 23.6% hike in salaries and pensions recommended by the Seventh Pay Commission is expected to boost demand for consumer goods after it is implemented from 1 January 2016, though any such pick-up will only be over period of time as there is unlikely to be any significant accrual of arrears.

Joshi said that the recovery in investment demand is led by public expenditure, such as road construction. “There is yet to be any sign of pick up in private investment demand. Investment is also a very volatile component of growth. Sustainable recovery in investment is still some time away," he added.

Various surveys have already indicated a pick-up in consumer and business sentiment. The Business Expectations Survey (BES) by the National Council of Applied Economic Research (NCAER) released on Monday shows a revival of business sentiment after the Business Confidence Index (BCI) fell for two consecutive quarters.

BCI for the second quarter showed an increase of 6.3% in October 2015 over July 2015 on a quarter-on-quarter basis. However, the BCI continued to fall on a year-on-year basis (9.1%).

Another survey by ANZ Bank and Roy Morgan research firm released last week also showed the Indian consumer confidence rebounding strongly in November after dipping in October, buoyed by increased optimism about the country’s economic outlook over the next 12 months as well as the next five years. The ANZ-Roy Morgan India Consumer Confidence Index rose to 122, up 9.5 points in November compared with the previous month, pushing the index above its long-term average of 117.

Bornali Bhandari, a fellow at NCAER, said that the economy has shown signs of bottoming out, but recovery remains weak and fraught with uncertainty.

“There is improvement in business sentiments and stabilizing of political sentiments. The improvement in sentiments of small and medium enterprises is the best signal that this survey shows. The capital goods and services sectors also show improvement in sentiments," she added.

Bhandari, however, said that the percentage of respondents saying that “present investment climate is positive" remains at 43.3% in October 2015, signalling that investment sentiment remains subdued. “And the continued weak expectations on hiring labour in the next six months and weak confidence in ‘managing unemployment’ imply that improvement in business sentiments may not necessarily translate to more jobs in the near future," she added.

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