The economy turns around as third-quarter GDP growth lifts future prospects

Looking at sectoral growth rates, Q3 benefited from manufacturing growing by 8.1% and agriculture by 4.1%

When the Central Statistics Office (CSO) released the first advance estimates (FAE) of national income in early January, the central message was that economic growth had hit the bottom; the only way forward was up. The second advance estimates (SAE) released on Wednesday suggest that the Indian economy may finally be getting out of the woods. That is because the quarterly estimate of gross domestic product (GDP) for the third quarter (Q3), which was also released alongside, showed that GDP grew by 7.2 per cent in October to December 2017. Moreover, the Q2 GDP growth estimate was revised from 6.3 per cent to 6.5 per cent. Thus, taken together with the 5.7 per cent growth in Q1 — which rang the alarm bells for policymakers — the overall picture for the economy’s growth seems to be improving rapidly. As such, the CSO revised upwards its own GDP estimate for 2017-18 — from 6.5 per cent, according to the FAE, to 6.6 per cent now. But the Q3 number has raised hopes that the eventual growth for 2017-18 could end up closer to the 6.7 per cent-mark. If that happens, India’s growth in 2017-18 would be within 50 basis points of its growth in 2016-17, when it grew by 7.1 per cent.

Looking at sectoral growth rates, Q3 benefited from manufacturing growing by 8.1 per cent and agriculture by 4.1 per cent. Both trends are noteworthy. The revised data shows that manufacturing actually contracted by 1.8 per cent in Q1 — the quarter before the goods and services tax (GST) regime was implemented. However, since then it has recovered fast to grow at 6.9 per cent in Q2 and over 8 per cent now. Manufacturing performance is not totally unexpected as other variables such as the index of industrial production (IIP) were showing a positive trend in the run-up to this release. Agricultural growth is significant as it comes on a high base as well as the latest crop production estimates projecting a level less than last year’s. To still grow at over 4 per cent possibly points to diversification in the agriculture sector, away from the dominance of crop incomes. Also noteworthy was the sharp growth in the construction sector in Q3 after several quarters of plodding along at 3 per cent or less. From the expenditure side, the heartening news is the 12 per cent growth in gross fixed capital formation (GFCF) — which maps new investments in the economy — in Q3. This is a sharp move up from the 4.7 per cent growth in the GFCF in Q2, according to the FAE. The turnaround has reversed the overall trend for the GFCF in 2017-18. While the FAE showed the GFCF falling from 29.5 per cent of GDP in 2016-17 to 29 per cent in 2017-18, the SAE shows it growing from 31.1 per cent (of GDP) in 2016-17 to 31.4 per cent in 2017-18.

The real threat to this upturn in the Indian economy comes from higher inflation. This could be triggered by a variety of factors such as costlier crude oil prices or a bad monsoon, or a larger-than-anticipated slippage in the fiscal deficit. The January GST revenues have been disappointing and the fiscal deficit (till January) is at 114 per cent of the full-year target. It is the government’s duty to protect the green shoots of recovery.