GDP Takeaways

It may be early days to make a full year projection

The GDP for the quarter ended September 2017 came in slightly better at 6.3%. This surely looks flattering when compared to the 5.7% level touched in the June quarter. But GVA (excluding the impact of taxes and subsidies) was just 6.1%. The overall number may not really present the full picture. Look at the subplots

Some hot, some cold

The GDP growth at 6.3% was largely driven by the joint impact of the manufacturing and the services sector. Both grew closer to the 7% mark. However, farm output left a lot to be desired. Agricultural growth at 1.7% is indicative that the government’s top-down approach is really not working. Firstly, the huge spending that the government has done in rural roads and rural infrastructure is hardly enhancing rural incomes and rural output. That means the government’s dream of doubling farm incomes by 2022 is likely to remain just that. Secondly, the lag effect of demonetization appears to be continuing for the agricultural sector. While other consumer-driven sectors appear to have benefited from the remonetization exercise, the agriculture sector is hardly showing signs of growing. Lastly, the prices of farm products in the Mandis falling below the MSP have done little to improve farm output. Farmers are not seeing any added benefit of increasing output and a lot will depend on next monsoons.

Impact of GST missing

The GDP number for the quarter ended September does not capture the impact of GST. The data collection of the GST impact would have been at a very preliminary stage and the real impact will be more visible in the December quarter. If the core sector and IIP numbers are to be believed, the negative impact of GST is quite pronounced. That means the impact on manufacturing may actually be severe in the coming quarters. Let us not forget the SME sector. If early statistics are any indication then the real hit of the GST appears to be on the SME sector. That impact will also show up in the manufacturing and services output in the December quarter.

Will India lag China?

The big story last year was that India would get the better of China in terms of GDP growth and sustain the advantage. The truth may not be too encouraging. The government could struggle to even reach 6.4% GDP growth for the full year which means India’s GDP growth is likely to lag that of China. That can be partially attributed to demonetization and partly to GST. The moral of the story is that China is seeing a sharp revival and may even widen the output gap with India in the coming years. At a time when EU, China, and Japan are recovering, India cannot afford to lag in GDP growth! ©

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