Stimulus props up GDP numbers

India’s robust Q2 GDP growth may have surpassed expectations, but a closer look reveals that excluding government spending, growth is actually on the lower side.

The Sensex gave a 273-point salute to India’s better than expected GDP numbers for Q2 FY2010 on Tuesday, but investors could have missed a key dampener in the statistics. India’s GDP surged 7.9% in the July-September period, helped by a strong rebound in the services sector, which clocked a 9.3% growth. However, the biggest push was given by government consumption, which registered a phenomenal 26.9% growth. Excluding this statistic, GDP growth in Q2 would have actually been lower than that in Q1.

An Anand Rathi Research report confirms, “The higher-than-expected growth in 2QFY10 is mainly because of the 26.9% growth in government consumption. If you exclude government consumption, GDP growth in 2Q would have been 4.9% against 5.5% in 1QFY10.” The report says that the high government spend in part has emanated from the implementation of pay hikes for public servants.
Standard Chartered observes in its research report, “The sustainability of such a strong rebound is a concern for us. Government expenditure has been one of the key drivers of the positive GDP growth. Given that the role of increased government expenditure was most discernible in H2FY09, the net support to headline GDP from now on can be contained as the unfavourable base effect kicks in.”

Another worrying factor is the continuing decline in investment. Growth in investment fell to its lowest in eight years, dropping to 1.9% in Q2 from 3.1% in Q1. Anand Rathi Research attributes the deceleration in investment to an uncertain future outlook and relatively low capacity utilisation in the manufacturing sector.

These factors lend support to the argument that the stimulus has played a key role in boosting GDP numbers. “The deceleration in GDP growth excluding government consumption and continued deceleration in investment growth clearly indicate it is the stimulus which is propping up growth,” states Anand Rathi Research.

Given the tentative nature of economic recovery, the government may not consider withdrawing stimulus measures anytime soon for fear of putting a spanner in the fragile recovery process. Confirms Anand Rathi Research, “The 2Q GDP data implies that an early exit from the stimulus measures looks unlikely, given the numbers show that withdrawing them could drag down GDP growth. We expect the RBI to maintain its easy liquidity and low interest rate policy in FY10 although withdrawal of some of the excess liquidity in Jan ’10 policy looks likely.”

This robust performance is also not likely to continue going forward. Q3 GDP growth is expected to mellow down, given the impact of weak monsoon on agricultural output. The Standard Chartered report mentions that a drop in the overall GDP growth figure versus this quarter would not be surprising, given that a drop in kharif production should be reflected in the Q3 agricultural sector performance. – Sanket Dhanorkar

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