India's first quarter (Q1) gross domestic product (GDP) slowed to 7.1% from 7.5% in the same period last year mainly due to lower activity in farm, mining and construction sectors, official data showed, even as industry said the numbers reflected a moderation of growth impulses.
The decline was largely because of dwindling private investments – particularly real fixed investments. Fixed investments declined 3.1% on-year after having shed 1.9% the previous quarter (see image below). This is a result of excess capacity and high leverage in many sectors. The fall in investments was also in sync with the continuous decline in the capital goods industrial production. Consumption growth, however, did the anchoring, says ratings agency CRISIL in a report.
Given high level of discrepancies in GDP, Edelweiss Securities Ltd says it prefers to analyse economic activity on gross value added (GVA) basis. "Besides, GDP data is highly influenced by the government’s subsidy payments, which are volatile. Still, data suggests that private consumption and capex slowed, while exports and government spending supported growth," it added.
Standard Chartered Bank (StanChart) also says even though the GDP growth in Q1 has come at 7.1%, the slowest in five quarters, it focuses more on GVA, which it thinks is a better indicator of economic activity. In a note, StanChart says, "The Q1 GVA was in line with expectations at 7.3%. We forecast FY17 GDP at 7.7% year-on-year (yoy) and GVA at 7.4%, underpinning the theme of gradual recovery. FY16 GDP was 7.6% and GVA 7.3%."
"As GDP is arrived at by adding net indirect taxes to GVA, GDP in general is expected to be higher than GVA unless net indirect taxes are contracting. In India's case, while growth of net indirect taxes is likely to remain slow in FY17 as the impact of excise tax hikes during 2014 and 2015 normalises, it is not in contractionary territory. Thus, we think that lower GDP than GVA will correct in the remainder of FY17," the report from StanChart says.
Religare Capital Markets Ltd feels that the sharp slowdown in net indirect taxes pulled down GDP growth during the first quarter. "While indirect taxes continued to grow rapidly led by excise duty hikes on petrol and diesel in FY16, subsidy payments shot up by 53% YoY in Q1. Net indirect taxes (indirect taxes – subsidies) account for the difference between GDP and GVA," it said.
According to State Bank of India (SBI) Ecowrap, the first quarter GDP growth was more in consonance with reality. In a note, SBI says, "Private final consumption expenditure has also declined, but has been compensated by Government final consumption expenditure, which has shown double digit growth at 18.8%. The growth in Government final consumption expenditure can be attributed to One Rank One Pension (OROP) implementation. This has led to the highest growth of Total final consumption expenditure in six quarters."
SBI says, the business sentiments improved significantly in the country in response to several initiatives such as ‘Make in India’ and faster clearances of stalled projects, particularly, in respect of non-environmental permissions. "The number of stalled projects declined sharply from 759 in March 2015 to 374 in June 2016. Although in terms of amount, it has increased in the past three quarters. During FY16, the Project Monitoring Group cleared 168 large projects with the majority of these projects in the power, roads, coal and petroleum sectors," it added.
Looking forward, CRISIL says, it expects the growth to inch up in coming quarters. "On the whole, improved rural incomes on account of a favourable monsoon, lagged impact of interest rate reductions, Pay Commission payouts and easy monetary conditions should support demand in fiscal 2017. Consequently, investment cycle revival can be expected towards the end of fiscal 2017. We, therefore, expect real GDP growth to inch up to 7.9% in fiscal 2017 from 7.6% in fiscal 2016," the ratings agency says.
For FY2017, Edelweiss expects modest recovery. It says, "For FY17, we expect slow economic recovery to continue. This is mainly due to easing of financial conditions in the economy, normal monsoon and receding of exports drag. The government’s spending in infrastructure should also aid growth. However, increase in wholesale price index (WPI) could pose a statistical drag on GVA print going ahead."
According to StanChart, the forward guidance by BSE 500 non-finance companies signals hope for a turnaround during second half of FY2017. "While the demand recovery for consumption will take place in second half, investment as a whole remains weak, with a few sectors doing well. These companies are pinning hopes on a favourable monsoon and seventh Pay Commission payouts. At the same time, they are cautiously optimistic on the pace of recovery. Key sectors that are witnessing demand momentum are power transmission, renewables, defence, roads and railways," it added.
"India has witnessed a normal monsoon so far, which has boosted Kharif sowing (+4.7% YoY as on 26 August 2016) and bodes well for agricultural growth. Besides, reservoir levels have also improved and should support a healthy Rabi season harvest. Healthy growth in agriculture, implementation of the 7th CPC, benign inflation and an accommodative monetary policy stance is expected to boost consumption demand, leading to acceleration in growth. Thus, we maintain our
GVA growth estimate for FY17 at 7.7%," Religare concludes in its note.