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India's FY15 GDP estimated to soar 7.4% under new methodology

With size of the economy shrinking, fiscal deficit target will be difficult to meet

BS Reporter  |  New Delhi 

The government on Monday estimated India’s economic growth this financial year at 7.4 per cent, against 6.9 per cent in 2013-14, as the country changed its definition of gross domestic product (GDP) and the base year for calculating it.

The estimated growth for 2014-15 is the same as China’s growth for 2014. Earlier, both the International Monetary Fund and the had said India’s growth would exceed China’s by 2016-17.

According to data released earlier, growth stood at 5.7 per cent in the first quarter of 2014-15 and 5.3 per cent in the second. However, according to the new data, the first quarter recorded 6.5 per cent growth, the second 8.2 per cent and the third 7.5 per cent (agricultural output contracted during the third quarter). Had the government not increased its spending, growth in the third quarter would have been lower, though high spending would have exerted pressure on the fiscal deficit front.

Gross fixed capital formation, a proxy for investment, and private final consumption expenditure, which reflects demand in the economy, witnessed a slowdown in growth, as interest rates remained high.

Considering the new data, the second quarter of 2014-15 recorded higher growth compared to the first, contrary to results thrown up by the previous methodology.

Going by a like-for-like comparison, the projected growth for 2014-15 stands at a four-year high; growth in 2010-11 was 10.3 per cent.

The data will boost the confidence of the National Democratic Alliance government, despite the fact that much of the higher numbers were due to a statistical change — the definition of was changed to include indirect taxes (net of subsidies), or at market prices. Also, the base year was changed from 2004-05 to 2011-12.

"Based on this performance, it does look like the Budget will target growth of 7.5-8 per cent in its calculations for FY16, as the policy measures adopted and stable economic conditions will facilitate such growth next year," said Madan Sabnavis, chief economist of CARE Ratings.

He cautioned while the new numbers reinforced the earlier series' view of improvement, these were magnified significantly. "Therefore, overall perception on the should not change."

Against advance estimates, results of the three quarters are primarily based on actual data, even as the Index of Industrial Production data for December are yet to be released. The advance estimates are based on actual data for two quarters, part actual and part projection for the third quarter and a projection for the fourth.

These estimates aid calculations for the annual Budget, scheduled to be presented on February 28.

According to the new estimates, the size of India's during 2014-15 has been reduced slightly to Rs 126 lakh crore from Rs 129 lakh crore projected in the Budget. As such, it will be more difficult for the government to meet its fiscal deficit target. Even if it restricts the deficit to the budgeted Rs 5.31 lakh crore, this would be 4.2 per cent of GDP, against 4.1 per cent estimated in the Budget. The fact that government expenditure on public administration, etc, is projected to rise to nine per cent in 2014-15 from 7.9 per cent in 2013-14 will also widen the deficit.

"Nominal GDP for 2014-15 has been pegged lower than in the Budget, which will make the task of restricting the fiscal deficit at 4.1 per cent of GDP more stringent," said Icra senior economist Aditi Nayar.

Despite the reduction, India's will remain a $2-trillion one (at the current value of 62.17/dollar).

Even as annual economic growth rate is projected to pick up in 2014-15, agricultural growth is slated to fall to 1.1 per cent from 2.7 per cent in 2013-14.

This financial year, industry is estimated to grow 5.93 per cent, against 4.5 per cent in the previous financial year. While the manufacturing segment is expected to expand 6.8 per cent (5.3 per cent in 2013-14), electricity and related sectors are estimated to expand 9.6 per cent, against 4.8 per cent in 2013-14. Growth in mining and quarrying, however, is expected to fall to 2.3 per cent from 5.4 per cent in FY14, while growth in the construction sector is estimated at 4.5 per cent, against 2.5 per cent during the previous year.

In 2014-15, the services sector is estimated to grow a stellar 10.62 per cent, against 9.05 per cent in the previous year. Within services, financial, real estate and professional services are set to expand 13.7 per cent, compared with 7.9 per cent in 2013-14. Trade, hotels and other segments are estimated to expand 8.4 per cent, against 11.1 per cent in 2013-14.

India's per capita income is projected to increase to Rs 88,533 in 2014-15 from Rs 80,388 in 2013-14 and Rs 71,593 the previous year. The average income of an Indian is estimated to rise 10.1 per cent, against 12.3 per cent in 2013-14 and 11.3 per cent in 2012-13.

For the quarter ended December 2014, agricultural production contracted 0.4 per cent, against two per cent expansion in the September quarter and 3.5 per cent growth in the June quarter, as kharif output was hit by a delayed monsoon.

Largely, it was a 20 per cent rise in government expenditure on public administration, defence and other services that propped GDP growth in the December quarter; growth in this expenditure was 6.9 per cent in the September quarter and 1.9 per cent in the June quarter. Besides, electricity generation and financial services also boosted the economy, growing 10.1 per cent and 15.9 per cent, respectively, in the third quarter.

The manufacturing sector expanded only 4.3 per cent in the third quarter, against 5.2 per cent in the second and 6.1 per cent in the first. Growth in the construction sector fell to 1.7 per cent from 7.2 per cent in the second quarter and 5.1 per cent in the first.

While gross fixed capital formation rose 1.64 per cent in the December quarter from 2.79 per cent in the September quarter and 7.65 per cent in the June quarter, private final consumption expenditure grew 3.53 per cent, against 8.69 per cent in the second quarter and 4.34 per cent in the first.

The Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry sought to draw the government's attention to these areas, stressing the need for Budget measures to revive investment and demand in the economy.

First Published: Tue, February 10 2015. 00:59 IST