Investment cycle: Is the worst over?

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GVA growth (gross value added) came in at 7.3 per cent in Q1FY17 (7.4 per cent in Q4FY16). Gross domestic product (GDP) growth also declined to 7.1 per cent in Q1FY17 (7.9 per cent in Q4FY16).

There are a couple of things that merits attention in this latest round of data release. First, GDP growth is lower than GVA growth, attributable to 53 per cent y-o-y jump in subsidies payout. Though subsidies payments remain elevated in first the two quarters, the silver lining is that net indirect taxes in Q2 is generally higher than Q1. Hence expect Q2GDP to be higher than Q2GVA.

Second, Q1FY17 agriculture growth in real terms (1.8 per cent) was lower than the average of the last three financial years (2.5 per cent). In nominal terms agriculture grew 8.2 per cent. Agriculture deflator increased to 6.2 per cent in Q1 compared to 4.5 per cent in Q4 FY16. With food prices starting to cool off expect a better agri number in Q2.

Third, the service sector growth has weakened significantly in Q1FY17, even as public administration, etc, logged in a 12.3 per cent growth, on the back of a 24 per cent jump in government expenditure. The sub-segment trade registered an 11-quarter low sequential growth, a reflection of demand laggard within the system.

Fourth, CSO follows the traditional method of single deflation in which only the final value added is deflated. However, there has been a recent debate about the efficacy of using single deflator in the wake of diverging trends of CPI and WPI in India. However, after reaching a high in September 2015, the gap between retail and wholesale prices (GDP deflator mirrors WPI) has started declining. This convergence indicates that the existing CSO methodology of arriving at real GVA will continue to be appropriate.

Fifth, a word on manufacturing. Industry grew at 8.4 per cent in Q1FY17 (7.9 per cent in Q4). Corporate GVA growth has decelerated in Q1 FY17 though this trend may reverse if commodity price continue decline.

The good thing is that there are a number of consumption-driven sectors showing overall better growth (revenue, PBDIT & PAT), which bodes well for future economic growth. On the downside, y-o-y growth in order inflow in Q4FY16 in capital goods segment is still in single digits. Based on project awarded in FY17 (till July), we believe that execution and growth will pick up from H2FY16.

Soumya Kanti Ghosh
Chief Economic Advisor, SBI