GDP growth higher than expectations, but no Covid-19 impact spoken of

Q3 GDP growth, which has come in at 4.7%, could be the precursor to an even higher growth number in Q4 which should be around 5%

The GDP numbers that have been released are significant for three reasons. First, the second advanced estimate does not expect growth to change from the earlier projection of 5 per cent for FY20 which is a comfort. Second, the impact of coronavirus has not been mentioned and hence it implies that is not likely to dent these numbers, which is a positive though the sceptic would remain uncertain on this issue. Third, for Q3, growth has come in at 4.7 per cent, which is higher than expectations and could be the precursor to the even higher growth number expected in Q4, which should be around 5 per cent. The low base effect will help move towards this number, but beyond that there are few signs of a rebound this year, especially with the core sector data for Jan showing just about stable growth of 2.2 per cent. IIP growth will be low this month.

The discomforting fact from the numbers is that investment continues to be declining as the GFCF rate is to be lower at 27.5 per cent this year as against 29 per cent last year. This reveals that investment is still stagnant and while the Central Government's efforts are well known, there is lacunae in what states as well as private investment are able to do. The states need to have some flexibility in pushing capex beyond the dictates of the 3 per cent fiscal deficit number while the private sector would lag as long as the financial sector is going through this transformation post the NPA crisis.

Looking at the internals of Q3, there are few surprises. The government sector continues to be the driver with growth of 9.7 per cent, followed by the financial sector with 7.3 per cent. It is the services sector that has been driving growth, which though positive, is not adequate and it does look like that it will take another 3-4 quarters before the real sector led by manufacturing actually propels growth. Till then we may have to be satisfied with growth in the region of 5 per cent per annum, which can go up due to statistical effects. Trade, transport has grown by 5.9 per cent, which is a slowdown from 7.8 per cent and the lower tax collections on GST are a reflection of the same. This is being seen even for the full year.

The low growth in construction is a worry as this is a reflection of the real estate sector where several measures have been announced by the government, which hopefully should work over time. This is one sector that can also drive employment especially in the unskilled category and has been affected by both, funding issues as well as demand, given the challenges in the financial sector.

Manufacturing sector growth at just about 1 per cent for the year is based on extrapolation of the first three quarters of corporate performance and the implication is that the Q4 will not be too exciting. In fact, several companies have spoken of the impact of covid-19 impacting production processes and there could be a downward bias here too. This will be something to watch out for in the fourth quarter.

The positive this year has been agriculture that has grown by a healthy 3.7% which is due to good kharif and rabi crops. While this has not led to higher incomes for farmers and the price volatility has been high, the physical output has been high.

On the whole the picture is satisfactory given expectations of growth in the range of 4.5% for Q3. The fact that the 5% mark has been retained for the year may be a trifle optimistic but with a bit of luck could be attained.

Madan Sabnavis, Chief Economist CARE Ratings. Views are personal