The Indian economy grew at 7.2 percent in October-December 2017, and will likely expand 6.6 percent in 2017-18, latest official estimates said on Wednesday, amid strong revival signs in consumption spending and investment activity.
The economy is poised to move into a faster lane, swiftly recovering from the disorderly effects of demonetisation and the goods and services tax (GST). The rebound in India’s “real” inflation-adjusted gross domestic product (GDP) growth from 6.5 percent in the previous quarter (July-September) will likely help regain its lost status as the world’s fastest growing major economy outpacing China, which grew 6.8 percent in October-December 2017.
Latest estimates broadly mirror the trends seen in high frequency indicators like corporate income and industrial output data. It is in line with the government’s earlier estimates. In January, the government had projected that India’s GDP would grow at 6.5 percent in 2017-18. Implicit calculations suggest that GDP in the October-March period would grow at 7 percent.
The Central Statistics Office’s (CSO’s) second advance estimates released today are based on actual data for three quarters, which give a better picture of the health of the economy.
The CSO also estimated that gross value added (GVA), which is GDP minus net taxes, grew 6.7 percent in October-December from 6.2 percent in the previous quarter and 6.9 percent in the same quarter of 2016-17. GVA is set to grow at 6.4 percent in 2017-18 from 7.1 percent in 2016-17. It is a more realistic guide to measure changes in the aggregate value of goods and services produced in an economy.
The manufacturing sector grew 8.1 percent in the third quarter of 2017-18, from 6.9 percent in the previous quarter, and 8.1 percent in the same quarter of the previous year. The sector is projected to expand at 5.1 percent during the full year, inching towards last year’s 7.9 percent growth, indicating that factories and firms have moved on from the irritants caused by GST.
A mid-year switchover to GST from July 1 prompted anxious shops and companies to de-stock and clear up the inventory pile ahead of the new system’s kick off. Companies had significantly cut back production in June as part of a business strategy to carry over as little old stock as possible into July. Nobody was quite sure whether prices would rise, fall or remain the same after GST, which partly explains the jostle to drain out old stocks at heavy price markdowns.
Latest lead indicators have shown encouraging turnaround signs over the last few months, with urban consumption recovering into the year-end. The manufacturing sector appears to have recovered from the post-GST lull, along with a jump in industrial production, primarily capital goods output. Available data also suggests healthy growth of corporate earnings in that quarter, despite rising commodity prices.
Government revenue expenditure (minus interest payments) also accelerated to 24 percent (year on year) from 12 percent in the year-ago period. Non-agricultural growth has shown signs of improvement thanks to better investments and the service sector, including public administration and credit growth indicators.
Double-digit growth of capital goods, the sharp rise in capital spending of the central government and the modest pickup in capital spending of state governments in the third quarter of 2017-18, are likely to have contributed to the 12 percent expansion in gross fixed capital formation (GFCF) in October-December 2017-18.
However, since the value of new investment projects and the value of projects completed recorded a contraction in the quarter, it may be premature to conclude that a broad-based revival in investment activity has commenced,” said Aditi Nayar, Principal Economist, ICRA.
The agriculture sector grew 4.1 percent in October-December from 2.7 percent in the previous quarter, and 7.5 percent in the same quarter of the previous year. It is projected to grow 3 percent in 2017-18 from 6.3 percent in the previous year, CSO estimates said. Farm sector growth will likely remain subdued because of unfavourable estimates for kharif output of crops such as oilseeds, pulses, cereals and cotton, and the base effect related to record high output in 2016-17.
The construction sector grew 6.8 percent in October – December from 2.8 percent in the previous quarter as well as in the same quarter of the previous year, broadly reflecting trends in output and sales of inputs, such as cement and steel, even as the sentiment remains weak after the RERA Act and the GST.
“Improvement was broad-based, with a pickup in most production/investment demand indicators. Under GVA, agricultural and non-agricultural activities have both picked pace. Besides base effects, better construction and agri sectoral performance bodes well for employment creation prospects. Looking ahead, the likelihood of higher rural incomes (on higher MSPs) and pre-election spending is likely to be supportive of 2018-19 numbers,” said Radhika Rao, India Economist, DBS Bank.