Q2 growth at 7.4%, with manufacturing boost

Govt capital expenditure pushes investments, domestic demand a concern

India’s gross domestic product (GDP) for the three-month period ended  September 30 grew 7.4 per cent — a tad higher than the seven per cent in the previous quarter — with a boost from manufacturing and financial services.

The growth of the manufacturing sector — more than nine per cent — pleased the finance minister, Arun Jaitley. He said despite adverse global conditions, factory production had increased.

The statistics and programme implementation ministry released the figures on Monday. There was a slight increase in investments because of the government’s capital expenditure, but the domestic demand continued to be a concern. The growth was, however, much slower than the 8.4 per cent in the corresponding quarter of the previous financial year. Economists had projected that GDP would grow by 7.3-7.6 per cent this quarter.

The gross value added (GVA), comprising agriculture, industry and services, increased to 7.4 per cent in the September quarter, against 7.1 per cent in the June quarter.

According to the new methodology, the GDP is calculated as the GVA plus indirect taxes, excluding subsidies. However, over 35 per cent growth in indirect tax collection was not factored in, as additional measures such as the hike in excise duty on oil, service tax rate and the withdrawal of excise duty sops to the auto industry were not taken into account while calculating economic growth.

For the July-September period, the manufacturing sector grew 9.3 per cent, a record since the new series of GDP was introduced in 2011-12, compared to 7.2 per cent in the previous quarter. Gross fixed capital formation, a proxy for investment, showed an uptick by expanding 6.8 per cent in the second quarter against 4.8 per cent in the previous three months. However, much of this has come on the back of increased government capital expenditure.

YES Bank chief economist Shubhada Rao said, “Gross fixed capital formation... is expected to have been driven by government capex.” Jaitley, however, said there is also private sector investment which has now started picking up. “And I do hope in the months to come, it picks up faster.”

The impact of deflation was clearly visible as the GDP, without adjusting for inflation, rose just six per cent this quarter, against 8.8 per cent in the previous quarter.

Data showed that for the first six months of 2015-16, India’s GDP growth stands at 7.2 per cent at 2011-12 prices and 7.4 per cent at current prices.

Rao, too, said she expected a government-led capex cycle to crowd in private capex along with a lagged impact of lower interest rates, easing supply bottlenecks and an improved business environment over the next two quarters.

Analysts said healthy increase in manufacturing growth was not necessarily because of an increase in household and private sector demand.

Private final consumption expenditure for the July-September period rose 6.8 per cent in the second quarter of 2015-16 against 7.3 per cent in the first quarter.

“This shows that household demand is still dull. We do expect it to pick up in the third and fourth quarters of the financial year,” said Madan Sabnavis, chief economist at Care Ratings.

The July-September quarter GDP numbers will certainly lead to a downward revision of the official GDP growth estimates of 8.1 to 8.5 per cent, laid out in the 2014-15 economic survey.

Even eight per cent growth for 2015-16 requires the economy to grow 8.9 per cent in the next half.

In its last monetary policy meet in September, the Reserve Bank of India had downgraded its real GDP forecast to 7.4 per cent from 7.6 per cent. In early October, Chief Economic Advisor Arvind Subramanian had said the government would work on fresh forecasts for the year once the second quarter data came out.

“I think the second quarter figures give us a sense of satisfaction... We expect growth this year to be better than last year and even better the next year,” Jaitley said.

Financial, insurance, real estate and professional services sector grew 9.7 per cent compared with 8.9 per cent in the last quarter and 13.5 per cent in the same period last year.

The agriculture, forestry and fishing sector grew 2.2 per cent in the three-month period ended September 30, compared to 1.9 per cent for the April-June period and 2.1 per cent in the July-September period in 2014-15. In fact, much of the increase was on the back of allied sector such as forests produce, fisheries and livestock.