There is a bounce, but now it needs to sustain
The GDP estimates for the third quarter of the financial year came in at 7.2%. That is a sharp rise from 5.7% in the first quarter and 6.5% in the second quarter of the year. While the bounce in GDP estimates is evident, there is a huge catch-up that the GDP growth will have to do in the next financial year!
Big challenge for 2018-19
Based on the 7.2% growth in the third quarter and the likelihood of GDP growth sustaining similar levels in the fourth quarter, India may end the full fiscal year with growth of 6.6%. That will still be around 60 basis points lower than the previous year. CRISIL is now estimating the full year growth for 2018-19 at around 7.5%. While that will be a huge upward shift, the big challenge will still be to give that big push to GDP. That leaves us with some key assumptions. Firstly, it will mean that 2018 must be a year of good monsoons that can propel Kharif output growth back to the 2016 levels. Secondly, the manufacturing sector, especially the SME sector, will have to show some genuine traction in the coming year. It is this sector that has been hit the most by the combined impact of GST and the demonetization. Lastly, the dependence on government sponsored services has to reduce. We need to understand that the next year will be an election year where government’s ability to invest will be largely limited. Reaching 7.5% in the next fiscal will be quite a challenge!
First, the disappointments
The sharp deceleration in agriculture was the big disappointment for the third quarter. With agricultural output lower by over 200 basis points, there is a big challenge from the point of view of pushing farm incomes higher. There have been far reaching measures in the latest budget for rural and agri output but that is likely to show results only by next fiscal year. Secondly, there needs to be a big focus on the SME sector which has hardly shown any traction. In fact, manufacturing output by the organized sector has been quite encouraging but SME has been the big challenge. That also needs to be addressed urgently.
But, there is good news too
There is positive news flows on other fronts. A look at the core sector numbers clearly indicates green-shoots of a recovery. There has been a sharp increase in cement and refinery output and that is important as both have strong externalities. After a long time, all the core sector segments have shown a positive trend and that should also be seen as a positive. Additionally, even if you adjust for the base effect, the auto off-take numbers have been positive across the board. These are positive indicators. The push has to be sustained and capitalized if GDP growth has to graduate to 7.5% levels in the fiscal year 2018-19! ©