GDP numbers disappoint; 7.5% full-yr target possible if govt tempo keeps up

The Q2 gross domestic product (GDP) growth number is definitely lower than was expected at 7.1 per cent for two reasons. A higher growth looked logical, given that there was a favourable post-goods and services tax (GST) base effect in Q2FY18, when growth slowed to 6.3 per cent. Second, corporate results looked good for the manufacturing sector and would have indicated a more buoyant growth rate, which was not to be. Therefore, in a sense, the number is a bit of a disappointment. More so because to reach towards 7.4-7.5 per cent for the full year would require sustained growth in the region of 7.4 per cent for the next two quarters, which will have a higher base disadvantage of 7 per cent and 7.7 per cent, respectively. It may, however, still be possible if the government keeps up the tempo of spending and consumption growth recovers (which looks likely). 

The growth pattern once again clearly indicates that the government has been the leading sector in terms of both directly affecting activities, with the public administration segment doing really well with 10.9 per cent growth and construction with 7.8 per cent. This should be an acknowledgement of the government spending at both the central and state levels to keep the prospects encouraging and the relentless focus on roads and affordable housing could be the two key drivers. The only challenge here would be the maintenance of this tempo in the next two quarters given the fiscal pressures that may be building with a slower pace of tax collections, lower disinvestment proceeds, and limited transfer of dividend and profits of public sector units. 

Therefore, it would be interesting to see if the government can maintain this expenditure to prop up growth. It is important because Q3 has witnessed challenges in the financial sector on the liquidity front that has come in the way of operations of certain industries linked with non-banking financial companies, especially the small and medium enterprises. Therefore, the contribution of the private sector would be limited. 

One concern is mining, where negative growth has been witnessed. From the policy front, the speed-breakers need to be addressed. The positive power sector performance, though doing very well would also be driven partly by how mining does in the coming months. 

There is positive news on the investment front, where the GFCF rate has improved from 28.8 per cent to 29.2 per cent, which can again be attributed to the government as private investment — denoted by financial proxies such as debt issuances and bank lending — has been relatively low during this period. This will be the key for future growth and as it has been stagnant in the last three years at 28.5 per cent does promise hope in the coming year. On the other hand, the decline in the share in consumption is significant and while Q3 may be expected to be better needs to be monitored as it also is a reflection in a way of lower rural spending. While farm output is up by an impressive 3.8 per cent it does look like that there would be moderation in the coming months given the drought-like situation in some states and the delayed sowing of rabi crop in other areas. 

Therefore, once again, the farm sector may hold the clue for the delta in GDP growth, both in terms of providing output as well as consumption expenditure.  

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The writer is chief economist, CARE Ratings. Views are personal