GDP growth to be better in Q2, experts say

But disagree on extent of growth

July-September gross domestic product (GDP) growth would be higher than April-June's 5.7 per cent, the lowest in Prime Minister Narendra Modi's tenure so far, government sources say.

Chief Statistician T C A Anant is due to release the data on Thursday, and policy experts, economists and markets are waiting for the numbers with bated breath.

Government's optimism aside, July 1 was when the goods and service tax (GST) was rolled out. The indirect tax regime had exacerbated the slowdown in economic activity after demonetisation, on November 8, 2016. Among the worst hit was the unorganised sector; activities of this sector gets captured in national income data after a lag.

But government officials continue to be confident the second quarter numbers of FY18 would show a marked improvement. Speaking to Business Standard earlier this month, Economic Affairs Secretary Subhash Garg said indicators for the July-September quarter have shown there has been a turnaround from the first quarter and that the slowdown had bottomed out in April-June. "I am interested in the second quarter GDP numbers. If it turns out to be more than 6.5 per cent, then that assures us that the remaining three quarters might lead us somewhere closer to 7 per cent for the year," Garg had said.

Data available show the following trends: The Index of Industrial Production grew only 1.2 per cent in July, shot up to a nine-month high of 4.5 per cent in August, and slowed down to 3.8 per cent in September. The Purchasing Managers Index (PMI) in manufacturing dipped to an eight-year low in July before rising modestly in August to 51.2 and holding steady in September. The PMI in services fell to a four-year low in July, continued its contraction in August, and went above 50 in September. A reading above 50 on PMI denotes expansion, while one below that indicates contraction.

Auto sales, however, continued to be healthy, showing nearly 11 per cent rise in July, 13.6 per cent rise in August, and a slight slowdown in September at 9.18 per cent.

Experts and economists agreed the second quarter will show an improvement over the first quarter, but disagree on the extent of it.

"It (July-September GDP) could be better than the last quarter. Better to what extent, what are the underlying factors, we will have to wait and see," said C Rangarajan, former Reserve Bank of India governor and chairman of the erstwhile prime minister's economic advisory council.

Former chief statistician Pronab Sen said agriculture growth might be weaker than in April-June, where it had lost pace by growing at 2.3 per cent, against 5.2 per cent in the quarter before that. "In manufacturing, two contradictory effects will be playing out. In the first quarter, manufacturing growth was pulled down due to destocking before GST. There was restocking in the second quarter, which will have a positive impact. But manufacturing will also be reflective of the slowdown in activity due to GST implementation. We have to see which effect plays out stronger." Sen added he expected GDP growth in July-September to remain around the same levels as April-June, and full-year growth to be around 6 per cent.

D K Joshi, chief economist at CRISIL said GDP growth would be in line with the government's expectation. "We expect GDP growth to go as high as 6.5 per cent. There are some segments which may have done well, particularly services, consumer durables and fast-moving consumer goods. We are expecting on the higher side of a 6-6.5 per cent GDP growth range."

State Bank of India's Chief Economic Advisor Saumya Kanti Ghosh also partly agreed with Joshi's assessment, saying that GDP could be as high as 6.3 per cent. But also pointed out an anomaly which could be specific to the July-September quarter.

Ghosh said he expected gross value added (GVA) to not exceed 6-6.1 per cent in the second quarter. However, GDP could be higher simply because July-September was the first full quarter after GST. "GST collections that came in and input tax credit was not distributed evenly, so part of the tax which should have been refunded, we have to see how the CSO calculates that. GST refunds and distribution of SGST to states had not yet started then," Ghosh said, implying the net indirect tax figures might not be accurate. Ghosh added manufacturing GVA would rise to 3-4 per cent and agricultural growth rate would go up.