GDP down to 7.1%

GDP growth slowed to 7.1% for the Q1 (April-June) of 2016-17. It is the lowest in the last 6 quarters. However, India is still the fastest growing major economy while China stands second at 6.7%.

In this post, I will analyse the GDP figures sector-wise to figure out the reasons for underperformance of Indian economy in April-June Quarter.

Gross Value Added (GVA) and Gross Domestic Product (GDP):

Parameter	Q1 2015-16	Q12016-17
Real GDP	7.5	7.1
GVA	7.2	7.3

GDP = GVA + Indirect taxes – Subsidies

The fact that GDP has fallen despite a rise in GVA means that subsidies given were more than the indirect taxes collected by the government. This is a positive sign as it means that real production growth has increased and if government brings down the subsidies, we will see a better real GD growth figure.

 The composition

Sector	Contribution in growth
Primary	3.6
Secondary	24.7
Services	71.1

Services have been the main driver of growth yet again, with Agriculture under performing despite an early monsoon and decent Rabi produce. Manufacturing Sector has also been a good performer in terms of contribution.

Another way to look at it – Expenditure Method of GDP Calculation

GDP at Market Prices = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross fixed Capital Formation + Change in Stock + Net Exports

Private Final Consumption contributed 52.3% and Government Final Consumption contributed 28.6% confirming RBI’s statement that consumption will drive the growth this year. Net Exports also constituted 29.2% of GDP growth, meaning current account surplus in Q1.

On the other hand, gross fixed capital formation (investments) showed negative growth of 14.3%. This is a cause of concern because investments aren’t picking up despite all the efforts from RBI to solve the banking problems.

The Growth Drivers:

Manufacturing grew at 9.1% riding the lion of Make In India.

Another good performer was Electricity, Power and Gas which grew at 9.4%. The improvement in transparency to curb corruption in the sector has proved a big growth booster and Power Minister Piyush Goyal deserves applause for his performance.

Services also showed massive 9.6% growth majorly driven by increase in government expenditure in public administration, defense and other services.

The Growth Dampeners:

Household consumption was above 8% in last two quarters and fell to 6.7% this quarter. The fact that half growth in this quarter was driven by private consumption, a fall in the growth rate negatively impacted the GDP. What would be interesting to find out is whether urban demand faltered or rural. However, with good rains and 7^th Pay Commission, household demand is set to grow and we may see a better showing in Q2.

Agriculture probably slowed down due to the tail end of drought cycle. With normal to above average monsoon this year, we can expect a bumper kharif harvest and this will turn the state of agriculture and boost rural demand. Also, with significant 4.6% growth in net sown area in pulses, next quarter is expected to show a far better growth.

Constructions probably slowed down due to an early monsoon. Rains are a dampener for construction business and cement data bolsters the same.

Investments or Gross Fixed Capital Formation (GFCF) fell 3.1% suggesting that all the RBI’s and government’s efforts to revive projects, to clean up bank balance sheets and promote investments are yet to bear fruits.

The Road Ahead:

The major worry remains over-dependence on consumption. With the implementation of GST, which is a destination based tax, all the state governments would want to promote consumption in their states to gain more revenue. This would further skew the percentage of household consumption to GDP, which is already at more than 55%. Fears of inflation side, the skewness would dampen the GFCF further. Low investments are bad for the economy in the long run and they affect the manufacturing sector. For Make in India to become successful, India needs strong growth in GFCF.