GDP in 1QFY17 came in lower at 7.1% than Ind-Ra's expectation of 7.5%. However, gross valued added (GVA) at basic constant (2011-2012) prices came in line with Ind-Ra's forecast of 7.3% in 1QFY17. On the expenditure/demand side, real GDP was boosted by government spending. Government final consumption expenditure clocked a strong growth rate of 18.8% yoy in 1QFY17. However, it has failed to revive the investment demand in the economy as the gross fixed capital formation contracted 3.1% yoy in 1QFY17.
Ind-Ra has pointed out earlier that government expenditure alone can play only a limited role in reviving the capex cycle, as an overwhelming proportion of the total capex (FY16: 83.96% of investment) in the economy comes from the private sector (including central and state public sector undertakings and households). Private corporate sector investment continues to be constrained by factors such as leveraged balance sheets of infrastructure players, a high level of non-performing assets in the banking sector and low capacity utilisation rates in the manufacturing sector.
At the sectoral level, manufacturing growth at 9.1% surprised on the upside, particularly in the backdrop of weak factory output data for manufacturing in April-June 2016. The robust manufacturing growth in 1QFY17 clearly shows that the Index of Industrial Production (IIP) in its present form and shape is not capturing the manufacturing activity correctly and requires an upgrade immediately, lest it becomes a redundant indicator. The base year used for IIP calculation is 2004-2005, while industrial GVA is based on 2011-2012 prices. The use of 2004-2005 means a lot of data relating to industrial output is not captured by IIP.
The 'mining and quarrying' sector contracted 0.4%, while 'electricity, gas, water supply, and other utilities' grew at 9.4% in 1QFY17 year-on-year, respectively. The negative growth in mining activity is at variance with the positive growth registered by the sector in April-June 2016 as reflected in the IIP data. Construction activity also disappointed with a growth rate of 1.5% in 1QFY17, which is much lower than 5.6% in the same quarter of FY16. Services sector growth at 9.6% was the key driver of GVA, primarily led by the strong growth rate of 12.3% in government services. This is a welcome development from 4QFY16 when services sector clocked the lowest growth in seven quarters at 8.7%.
The agricultural sector grew at 1.8% in 1QFY17, which is lower than the growth rate of 2.6% in the same quarter of FY16. After two years of sub-par monsoon, the first half (June-July) of the monsoon season this year has witnessed a normal rainfall (same as long period average). July is the crucial month for sowing and rainfall for the country in this month was 6.6%, above the long period average. The cultivated area under kharif crops was higher than the normal area as of August 2016. The benefit of higher kharif acreage, mainly of pulses and oil seeds, will be realised in 3QFY17. Therefore, Ind-Ra expects agricultural GVA to pick up pace in 2HFY17, which will give a fillip to the overall economic growth.
GDP growth was lower than the GVA growth after five quarters. This was due to the slower growth of net taxes on products. The growth of net taxes on products (3.6%) in 1QFY17 was the lowest in last 16 quarters. Mirroring the trend of both wholesale and retail price inflation, in 1QFY17 both GVA and GDP deflators were the highest in last six quarters. The impact of high food price inflation was visible on agricultural GVA deflator (6.2%). Ind-Ra expects a softening in pulses prices to continue; however, the prices are likely to remain volatile due to structural issues related to agricultural supply chain.
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