GDP rises to 7.3% in September quarter, misses estimate

The annualized GDP for the 2nd quarter ended September 2016 came in at 7.3% slightly lower than the market consensus estimate of 7.5% for the quarter. The numbers were released by the Ministry of Statistics and Program Implementation (MOSPI) on November 30th 2016…

Tracking the GDP and GVA numbers for Q2…

GDP at constant prices for the second quarter of the fiscal year 2016-17 (qtr to Sep 2016) came in at Rs.2,933,000 crore. This is 7.3% higher than the GDP of Rs.2,762,000 crore for the second quarter of fiscal year 2015-16 (qtr to Sep 2015). However, the number of greater relevance for policy and economic purposes will be the growth in GVA (Gross Value Added). The difference is quite subtle. GDP includes the positive impact of taxes and nets out the negative impact of subsidies.

GVA is, therefore, a more reliable measure of fundamental growth in the various components of the economy. For the quarter ending Sep 2016, GVA came in at Rs.2,733,000 crore a growth of 7.1% over the figure of 2,552,000 crore in the quarter ending Sep 2015.The additional 20 basis points growth in GDP was largely on account of higher share of taxes in the form of excise duties, customs duties and service tax. Whether you look at GDP or GVA, the moral of the story is that there has been a slowdown in the overall economic growth and it is going to be increasingly difficult to sustain 7.5% annualized GDP growth for the full year.

Breaking up the GVA numbers for the second quarter…

India’s GDP continues to be dominated by the services sector at around 60% followed by the manufacturing sector and the agricultural sector. To begin with there is good news on the agricultural front. The agricultural component of GDP showed a growth of 3.3% for the Sept quarter compared to just 2% in the corresponding period last year. Obviously, the normal monsoons, better Kharif output as well as the government getting to grips with supply side shocks have helped the agricultural output to post a better performance.

Manufacturing overall slowed to 7.1% in the second quarter ending Sep 2016 as compared to a healthy 9.2% in the second quarter ending Sep 2015. The pain in manufacturing has come from the SME and the small scale sector. The SME sector has shown negative growth of -0.9% compared to 4.7% in the corresponding quarter last year. The corporate sector, which accounts for 70% of the manufacturing GDP, has actually grown at 11.9%. The only flag on the manufacturing sector could be that with the demonetization exercise putting pressure on the small scale sector, the growth in the coming quarter could come under further pressure.

In the services space, it has largely been a mixed bag. Among the gainers, construction, transport and communication services showed a clear growth over the corresponding quarter last year. On the other hand, services like gas and utility services as well as financial services actually showed slower growth in the second quarter of 2016 as compared to the second quarter of 2015. The real boost to the services sector came in from public administration, defence and other government services. This segment of services grew at a whopping 12.5% in the quarter to Sep 2016 compared to just 6.9% in the quarter to Sep 2015.

Trends on the expenditure side of GDP / GVA growth…

On the expenditure side, there are 3 key components to GDP. Firstly, there is the Private Final Consumption Expenditure (PFCE). This segment accounts for nearly 60% of GDP. For the quarter ending September 2016, the PFCE has grown by 12.44% compared to the corresponding quarter last year. This shows sustained contribution of consumption expenditure to the GDP. Secondly, there is the Government Final Consumption Expenditure (GFCE). This segment accounts for nearly 13% of overall GDP. For the quarter ending September 2016, the GFCE has grown by 20.61%, indicating that the government spending is going a long way in boosting GDP. Lastly, there is the tricky area of Gross Fixed Capital Formation (GFCF). This segment accounts for the balance 27% of overall GDP. For the quarter ending September 2016, the GFCF has shown a negative growth of (-3.24%) and continues to be the major worry for the government, industry and the RBI.

Key takeaways from the GDP numbers…

There are 4 key takeaways from the GDP numbers announced on November 30th…

  • Government intervention and initiatives are still accounting for a major chunk of the growth in GDP that we are witnessing today.
  • Capital formation is lagging and that is not a good portent either for the recovery of the capital cycle or for the capital goods segment performance.
  • Agriculture is showing green-shoots of recovery and it becomes critical considering that it is still the largest employer in India.
  • When the GDP data is combined with the likely effects of demonetization, it makes sustaining growth of 7.5% in GDP quite challenging.

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