Why India's latest GDP numbers may not be as good as they look

Gross value added and low investment activity by the private sector remain areas of concern

Shishir Asthana Mumbai
Rural consumption beats slowdown

Even before the first drop of rains have fallen on Indian soil, the markets have reason to cheer as Gross Domestic Product (GDP) numbers came in better than expectations. For the financial year ended 2016, the Indian economy recorded a GDP growth of 7.6%, in line with general market expectations; however, it was the fourth quarter growth which has caught the market interest.
Against expectations of 7.6%, GDP numbers for theMarch quarter stood at 7.9%. The surprising element is agriculture growth which stood at 2.3% compared to minus 1% in the previous quarter. A poor monsoon had led to expectations that the previous year’s Rabi crop would have been affected.

A matter of slight concern is the fall in industry growth and the change in trend of services sector growth. Industry has grown at a rate of 7.9% as compared to 8.6% in the previous quarter. The services sector reversed the rising trend of the previous three quarters by posting a growth of 8.7%, down from 9.1% in December quarter.
In industry, the main culprit was the sharp decline in steel production which fell by 14%, likely due to a drop in global demand and prices. But cement at 11% and power at 8.8% helped in giving some respectability to the numbers.

A key takeaway from the numbers is the growth in private consumption. Private consumption growth stood at 7.4%, despite headwinds of low employment rates and poor monsoon. Consumption in the fourth quarter improved to 7.6%, up from 7.4% in the previous quarter.
Gross value added (GVA) which is being tracked more closely than GDP by analysts has also shown marked improvement. GVA grew at 7.4%, the fastest in last six quarters. According to a Motilal Oswal report the GVA was entirely driven by agriculture sector.

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GDP number has a higher than normal level of allocation to ‘Discrepancies’ which is preventing analysts from getting a fix on where the growth is coming from.
Another interesting data point is that real consumption has grown faster than real investments (except valuables), which has resulted in savings falling below the psychological 30% mark. According to the Motilal Oswal report, savings are at 29.8%).

More important than these historic GDP and GVA numbers is what lies ahead. Markets expect that a higher than normal monsoon can push the overall growth to a higher plane. However, analysts are not as bullish on growth despite a better monsoon. Deepali Bhargava of Credit Suisse expects GDP to increase to 7.8% in the current fiscal, which is the same level that as others of her ilk.
The general perception is that a rise in oil and food prices will also restrict the central bank’s ability to reduce interest rates any further.

What has bogged down analyst expectation is the poor response by the private sector in investing in the country. Bhargava, in her interview to a television channel, pointed out that this recovery still looks very fragile. She in fact points out that this is not even a recovery.  A meaningful recovery in private sector capital expenditure may probably be in 2017-18. But by then the companies would be keeping their eyes fixed on the next election.
Does this mean that the India recovery story will be restricted to government spending till 2019?

First Published: Jun 01 2016 | 3:00 PM IST

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