Lower than expected

Disappointing GDP print buries some good news as well

The Union Ministry of Statistics and Programme Implementation on Thursday released the Second Advance Estimates of gross domestic product (GDP) for the ongoing fiscal year of 2018-19, which incorporate the quarterly estimates for the third quarter of the financial year, namely the quarter between October and December 2018. These figures came as a negative surprise, and the estimate for GDP growth in 2018-19 had to be decreased from the previous 7.2 per cent to 7 per cent for the full year. GDP growth was clearly decelerating over the course of the financial year. The third quarter saw growth of only 6.6 per cent. To be sure, India still grew faster than China in the third quarter (that country grew by 6.4 per cent in the December quarter), but that is a small consolation. 

The second quarter, between July and September 2018, had seen growth at 7 per cent, and the first quarter of the year, between April and June, had clocked in 8 per cent GDP growth. This is, as is evident, quite a sharp deceleration. What should be particularly worrying is that agriculture after solid growth of 5 per cent in 2017-18 might grow at only 2.7 per cent — in terms of gross value added in basic prices — over the ongoing fiscal year. This, together with the wholesale price deflator of -0.8 per cent for food items, is a clear reflection of possible agricultural distress that requires focused attention from the government.

It appears likely that one of the main reasons for the slower growth might well be a reduction in the pace of government expenditure over the year. A key indicator, namely Union government revenue expenditure (net of interest payments and subsidies) grew by 9.2 per cent over the period between April and December 2018, as compared to a growth of 16.7 per cent in the equivalent period one year previously. Gross value added at basic prices for the government sector is estimated to grow at 8.5 per cent over the current financial year as opposed to almost 12 per cent growth in the previous financial year. This suggests that much of the previous growth was pushed up by high government expenditure and now the fiscal mathematics makes this growth model unsustainable. 

However, there is also some good news suggesting that a more normal and sustainable private investment-led growth path might be returning. Gross Fixed Capital Formation, or GFCF, at current and constant prices are estimated to be 28.9 per cent and 32.3 per cent of GDP, respectively, during the current financial year. This is up from the corresponding rates in the previous year, 2017-18, of 28.6 per cent and 31.4 per cent. The rates of GFCF are also up in the third quarter of 2018-19 as compared to the previous quarter of the year. It is also worth noting that the manufacturing sector is due to grow — measured in terms of gross value added at basic prices — at over 8 per cent over 2018-19, as compared to under 6 per cent in the previous year. If accurate, this should eventually be reflected in healthy earnings for the private corporate sector, which comprises more than three-fourths of manufacturing output.