Icra sees GVA growth inching up to 6.3% in Q2

Credit rating agency, ICRA, on Tuesday said that it expects the growth of the Indian gross value added (GVA) at basic prices in year-on-year (YoY) terms to record a sequential recovery to 6.3 percent in Q2 FY2018 from 5.6 percent in Q1 FY2018.

This recovery will be led by a broad-based pickup in industrial growth (to +5.8 percent from +1.6), even as the expansion of agriculture, forestry and fishing (to +2.0 percent from +2.3 percent) and services (to +7.3 percent from +8.7 percent) is likely to display some moderation.

Excluding agriculture, forestry and fishing, and public administration, defence and other services, the growth of the GVA at basic prices is expected to record an even sharper pickup to 6.9 percent in Q2 FY2018 from 5.5 percent in Q1 FY2018.

"Q2 FY2018 marked a period of adjustment for the Indian economy, following the introduction of the new Goods and Services Tax (GST) regime. An improvement in corporate earnings, partly reflecting milder discounts and higher commodity prices, and a pickup in volume growth in the mining and electricity sectors, is expected to contribute to a sequential recovery in GVA growth in Q2 FY2018, offsetting the impact of the moderation in growth of the Central Government's expenditure and a tepid kharif harvest of several crops," said Principal Economist, ICRA Limited, Aditi Nayar.

"Manufacturing volume growth in Q2 FY2018 was not as strong as we had initially expected on the basis of restocking after the GST. Subsequent to the discounts that had been offered in Q1 FY2018, consumption demand was subdued in Q2 FY2018, particularly for consumer durables, dampening overall volume growth. However, corporate results suggest a sequential recovery in earnings growth in that quarter. This has been led by factors such as rising commodity prices, which helped boost the realisations in some sectors such as metals," she added.

The significant turnaround in the performance of the mining output, a favourable base effect, and supportive commodity prices, should boost the GVA growth of the mining and the quarrying sub-sector to a healthy 7.5 percent in Q2 FY2018, in ICRA's view.

Electricity generation also recorded an improvement in Q2 FY2018 led by the thermal segment.

However, the activity in the real estate sector remains subdued on account of weak consumer sentiment, led by factors such as the demonetisation-led drag, the full implementation of the Real Estate (Regulation and Development) Act, from May 1, 2017, and the implementation of the GST from July 1, 2017.

ICRA expects growth in the services sector to ease to 7.3 percent in Q2 FY2018 from 8.7 percent in Q1 FY2018.

In particular, the Government of India's (GoI's) non-interest revenue expenditure growth slid sharply to 0.8 percent in Q2 FY2018 from 26.8 percent in Q1 FY2018, reflecting the waning effect of front-loading of spending.

However, available data for 12 state governments indicates a pickup in their revenue expenditure growth to 14.1 percent in Q2 FY2017 from 10.7 percent in Q1 FY2018.

Based on the unfavourable 1st Advance Estimates for kharif output of crops such as oilseeds, pulses, cereals and cotton, and the base effect related to the record-high output in FY2017, ICRA expects the performance of crop GVA to be subdued in Q2 FY2018, dampening the GVA growth of agriculture, forestry and fishing to 2.0 percent in that quarter from 2.3 percent in Q1 FY2018.