Manufacturing, agriculture propel GDP growth; expect moderation going ahead

GDP growth for the first quarter came in at a higher-than-expected rate of 8.2% compared with 5.6% last year. Our estimate was 7.6%. It is also indicative of the continuation of progressively higher growth rates in the last 4 quarters post Q1-FY18 – higher than 7.7% in Q4 last year.

Two factors were responsible for this. First, the low base effect of last year provided a thrust. Manufacturing, in particular, has moved from a negative growth rate (mainly due to de-stocking last year) to a high of 13.5%. The same holds for construction, where a low base, as well as heightened infrastructure activity, contributed to the growth.

Second, a very strong performance from manufacturing and agriculture. In fact, the growth rates here were much higher than expected. The government continues to drive the economy with growth of 9.9% this quarter. Will this be sustained, is an important question as this can also put pressure on the fiscal deficit if not backed by revenue growth. 

The positive feature was a broad-based pattern of growth with the exception of mining. This is a surprise given the strong performance of the coal sector as revealed in the Core sector data. The services segments trade, transport etc. and finance, real estate etc. have registered lower growth rates compared with last year, where the base effect has worked in the reverse direction.  

An encouraging sign is a marginal uptick in the GFCF rate (at current prices) picking up from 28.7% to 28.8%. We may have to wait to see if this can be sustained as often there are slippages subsequently. Also, the financial markets side - as depicted by bond market and bank credit to non-retail segment - does not indicate a significant pick up in investment in Q1. Therefore, this needs to be watched in the next few quarters.

While we expect growth to be 7.5% for the full year, as the growth rates had started increasing in Q2-Q4 Fy18, achieving such rates of 8% may not be possible unless there is a major boost coming from any specific sector. Given the challenges of higher interest rates, weak rupee, oil price concerns etc.  We may expect some moderation in growth in the next few quarters.

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(The author is the chief economist, CARE Ratings. The views expressed are his own)