Q2 GDP: Agriculture, jobs growth cause for concern

Data on government spending are usually based on budgetary expenditure.

The second quarter GDP growth of 7.6 percent can be viewed as a strong statement of “resilient domestic economic activity in the strange and heady environment of formidable global headwinds” as the RBI describes current conditions. Evaluating interim economic performance is always difficult because of the base effects (as past numbers change a lot) and also the fact that some of the numbers (e.g., some in agriculture, services, utilities) are based on ratio and proportions of annual projections rather than actual field data. According to the World Bank, final figures tended to be different from previous numbers, on average, by 0.5 percentage points. All of this is well known, nevertheless, measuring the economy’s performance is crucial for policymakers. The most common assessment of the current quarter's performance has been that it well and truly exceeded street estimates of 6.5 percent. It is interesting to understand how this happened.

Manufacturing Rebounds

From the output side, manufacturing contributed 33 percent of the incremental Q2 growth, growing by 13.9 percent. It upstaged even the services sector, the contribution of which fell to 46 percent. While the low base helped manufacturing (there was negative 3.8 percent growth in Q2 2023), the IIP and core infrastructure sector data did show increased production in cement, steel and coal. The construction sector grew by 13.3 percent aided by both residential and infrastructure investment, especially by the government. Agriculture was a huge worry, as its low growth (1.8 percent) has consequences for rural jobs and incomes. However, the sluggish growth in the services sector was puzzling, especially in the context of booming goods and services tax (GST) collections. The explanation according to some that information technology (IT) and software firms were under stress doesn’t sound convincing as IT and software services form only about 10 percent of the total service sector GVA. Bank credit data also seem out of sync with output data. Even accounting for lags, between September 2022 and September 2023, industry received less than 10 percent of the incremental credit, with 46 percent going to personal loans and 33 percent to services sectors.

The expenditure side also had a few surprises. The contribution of personal consumption to incremental Q2 growth fell to 24 percent, as it grew by a measly 3.1 percent (compared to 6 percent during Q1 and 8.3 percent in Q2 of the previous year). This was a shocker, especially since the high-frequency indicators such as growth in automobile sales, FMCG and airline tickets seemed to suggest a consumption surge. The other surprise was the 49 percent contribution to incremental Q2 growth from gross fixed capital formation (or private investment). It is believed to be led by higher private capex investment though it is more likely that household (through housing) investment also had gone up. Bank credit at least, points to this. Data on government spending are usually based on budgetary expenditure and the growth of 12.4 percent in Q2 is attributed to the government spending nearly 49 percent of its full-year budget on capex, along with increased spending by 25 state governments. But government spending came in only third after private investment and personal consumption. There were no surprises on the external trade deficit which grew sharply by 95 percent during Q2 due to a continuous decline in exports. The increased trade deficit knocked off about 46 percent from the incremental growth in Q2.

Growth In The First Half

The half-yearly growth numbers seemed more representative on the output side. The contribution of the services sector to incremental GVA growth went up to 59 percent, while that of manufacturing declined to 22 percent.  Perhaps the blips in services output during Q2 reflect data issues rather than actuals.  But agricultural growth for the half year continued to be low at 2.4 percent. From the expenditure side, the first half’s contributions followed nearly the same pattern, though personal consumption’s share rose to 34 percent while that of private investment fell to 41 percent.

Overall, the 7.6 percent growth undoubtedly is reassuring about the general path of the economy, but the slowing down in agriculture and personal consumption are pointers to risks that may not be very clear now. Software services will be a key factor along with oil imports as far as trade deficits are concerned though growth projections will have to reckon with the fact that both are dependent on global economic and political conditions. However, October 2023 numbers showed India’s merchandise exports registering a growth of 6.2 percent (y-o-y) reversing past trends. But equally, merchandise imports surged by 12.3 percent (y-o-y) in October 2023 after eight consecutive months of contraction, led by gold more than oil. The buoyancy in tax collections (both direct and indirect) also points to resurgent economic conditions.

On the price front, the RBI’s economic report shows that headline inflation is moderating (4.9 percent in October 2023) but food inflation, though also declining was running higher at 6.2 percent. With the first advance estimates of kharif production for 2023-24 showing a decline of 4.6 percent (mainly in oilseeds and pulses), the pressure on food inflation could continue to be felt throughout the year. An aspect of GDP analysis that is sparsely discussed is employment. Here two indicators are important — the labour force participation rate (LFPR) and the unemployment rate. The RBI’s economic card shows the LFPR still abysmally low at 42 percent in October 2023, while the overall unemployment rate actually went up 10 percent in October led by rural unemployment, raising the question of whether the fastest growing economy is creating enough jobs.

SA Raghu is a columnist who writes on economics, banking and finance. Views are personal and do not represent the stand of this publication.