Recovery in economic growth under way

A favourable base effect will support GVA growth in most sectors

As expected, Indian Gross Value Added (GVA) growth improved to a four-quarter high of 6.7 per cent in the quarter ended December 2017 from 6.2 per cent in the September 2017 quarter.

This pick-up was fairly broad-based, led by agriculture, manufacturing, construction, financial, real estate and professional services, and public administration, defence and other services.

Only a few sub-sectors such as mining and quarrying, electricity, gas and water supply, trade, hotels, transport, communication and services related to broadcasting, displayed a sequential dip in growth in the December quarter, according to data released by the Central Statistics Office.

Services, industry grow well

Service sector growth improved to 7.7 per cent in the December quarter from 7.1 per cent in the September quarter, reflecting a favourable base effect, as well as the improvement in expansion recorded by bank credit, cargo handled at major ports, passengers carried by domestic airlines, foreign tourist arrivals and the Government of India’s (GoI’s) non-interest revenue expenditure.

Moreover, industrial growth rose to 6.8 per cent in the December quarter from 5.9 per cent in September quarter. This was led by an improvement in manufacturing GVA growth to a healthy 8.1 per cent now from 6.9 per cent in the previous quarter. The growth in manufacturing is supported by restocking of inventories after the festive season, a catch-up effect after the muted volume growth in the first half of 2017-18 and the healthy expansion of corporate earnings.

Furthermore, construction growth rose considerably to 6.8 per cent in the December quarter from 2.8 per cent earlier, reflecting the trend in its inputs, such as cement and steel, even though sentiment in the real estate sector remained weak after the introduction of RERA and the Goods and Services Tax (GST).

Despite an unfavourable base effect, agricultural growth rose to 4.1 per cent now from 2.7 per cent each in the previous two quarters. This reflects the year-on-year rise in output of sugarcane, cotton, coarse cereals and rice, revealed by the Second Advance Estimates of crop production, which have forecast a record output in several crops.

Notwithstanding the upturn in GVA growth in the earlier two quarters, the second advance estimates released by the CSO project a substantial slowdown in GVA growth to a four-year low 6.4 per cent in 2017-18 from 7.1 per cent in 2016-17, partly driven by the disruption in economic activity after the transition to GST. Based on this forecast, it appears that the CSO expects GVA growth to rise to 6.9 per cent in the March 2018 quarter from 6.7 per cent, previous quarter.

In ICRA’s view, a favourable base effect will support GVA growth in most sectors except public administration, defence and other services in the March 2018 quarter. However, the spikes in volume growth seen in some sub-sectors like auto production and steel in the December quarter may not continue. Additionally, the rise in commodity and fuel prices may temper the earnings growth of businesses in various sectors in the fourth quarter.

While low headroom for capital spending by the GoI may curtail the improvement in growth in the ongoing quarter, back-ended spending by state governments may support economic activity. At present, ICRA expects GVA growth to improve to around 7.3 per cent in the March 2018 quarter. Accordingly, we expect GVA growth at 6.5 per cent in 2017-18, marginally exceeding the CSO’s second advance estimate of 6.4 per cent.

Looking ahead, a reasonably well distributed monsoon, improving sentiment and staggered pay revision by the state governments should support consumption growth and push up capacity utilisation in 2018-19. A pick-up in global economic growth may boost Indian exports to some extent, although the increase in tariffs imposed by the US may trigger similar action by other countries, hurting overall trade.

Moreover, expansion in government spending at the Central and state level should support economic activity and infrastructure creation. The bank recapitalisation process and resolution of insolvency proceedings should help to ease the twin balance sheet constraints on fresh investment.

Pause on cards?

Elevated bond yields may shift incremental demand for credit to the banking system from the bond market. However, considering recent developments, if higher risk aversion slows down decision making in the banking system, the much-awaited investment recovery may get deferred. Overall, ICRA expects GVA growth to improve to 7 per cent in 2018-19, mildly lower than the Monetary Policy Committee’s (MPC) baseline estimate of 7.2 per cent, with risks evenly balanced.

Based on the GVA growth for the December 2017 quarter, we expect the MPC members to continue to focus on nurturing the nascent economic recovery, suggesting a pause in the April 2018 policy review. However, if the CPI inflation remains elevated in the second half of 2018, a rate hike may be on the cards.

The writer is Principal Economist, ICRA

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