Resilient economy shrugs off DeMo blues

After slipping for five quarters consecutively, domestic production (GDP) growth in the second quarter of the current fiscal rebounded to 6.3% from 5.7% in the first quarter, primarily on higher growth in manufacturing due to re-stocking after GST rollout and uptick in mining and quarrying and construction activities.

Most economists believe the revival in national income growth was in line with their expectations and was moving in the right direction after major reforms undertaken by Prime Minister Narendra Modi government.

D K Srivastava, chief policy advisor, EY India told DNA Money that the 6.3% growth was still below India's growth potential of 8% but it was in the right direction.

"It is still much below our potential of 8% growth but, at least, it is moving in the right direction," he said.

Going forward, he said the growth propeller of government expenditure would be subdued in coming quarters as most of it was "front-loaded" in the first quarter.

"Since most of the government expenditure was front-loaded in the first quarter and fiscal deficit challenges will not allow the government to borrow and spend, the government would have to depend on exports, manufacturing and service sector for GDP growth," said the EY economist.

Services sector growth slowed in the September quarter.

According to Srivastava, a 6.3% GDP growth in the first quarter had made the full fiscal forecast of 6.7%-7% by most economists difficult to achieve.

"Average of two quarters growth is 6%. For 6.5%, we would need 7.5% growth in the coming two quarters. Jumping from 6.3% to 7.5% would be difficult, but I think 6.4%-6.5% average GDP is feasible for the third and fourth quarters," he said.

Hugo Erken, senior economist at Rabobank, whose own estimate for September quarter GDP growth was 5.9% and who had accurately predicted the June quarter growth at 5.7%, said the revival in the growth was sustainable.

"Personally, I think it is sustainable. I've always regarded the (impacts of) reforms that the Modi government has implemented such as GST and the demonetization as transitory. I have no reason to suspect that the potential GDP has been affected by either of these reforms. A combination of large foreign direct investment (FDI), upbeat domestic private consumption and private investment will see the recovery continuing," said the Dutch economist.

Erken was a little taken aback by a strong recovery in the GDP; "The figure was a little higher than I was expecting personally. I had a forecast of 5.9%. I thought GST (goods and services tax) would weigh a little more on the economy. It proves that the economy was more resilient than I had expected. What was very surprising for me is that private investment were pretty upbeat. It was something like 4.6% gross fixed capital formation, which means that firms are looking at expansion of capacity".

Aditi Nayar, principal economist, Icra, whose forecast of 6.3% GDP growth in the second quarter of the current fiscal on the mark, expects higher GVA growth in the second half (H2) of this fiscal compared to the first half (H1).

"A back-ended pick-up in spending by the state governments and a favourable base effect, are likely to contribute to a higher GVA growth in H2 FY2018 relative to H1 FY2018. However, the unfavourable advance estimates of the kharif output of most crops, as well as the impact of higher fuel prices on earnings, are likely to temper the improvement in GVA growth in Q3 FY2018. At present, we expect GVA growth to print at around 6.5% in Q3 FY2018, before rising to above 7.0% in Q4 FY201,"she said in a statement issued by Icra.

Nayar, however, feels that the strength of "sequential recovery in Q2 FY2018 in GDP and GVA growth was mildly weaker than expected". She said the uptick in growth of gross fixed capital formation to 4.7% in the September quarter from 1.6% in June quarter was in line with the turnaround in capital goods output to 3.7% from -4.2% during the same period.

Ranen Banerjee, partner - public finance and economics, PwC India, said the slowdown in services sector could be because of the three percentage point hike in GST for services from the pre-GST levy of 15% service tax.

"We also possibly need to examine whether the 3 percentage point increase in tax rate on services from an effective 15% pre-GST to 18% under GST causing some demand side impacts. We will need to wait for Q3 and Q4 GDP numbers to be able to comment on this more conclusively. With the lowering of rates on several goods and also further simplication of processes under GST regime, further growth momentum is expected in Q3 GDP numbers," he said.

Rana Kapoor, managing director of YES Bank, expects that "sound domestic economic fundamentals along with continued emphasis on reform momentum, are likely to ensure a sustained 8%+ growth for the Indian economy over the coming quarters".

Growth in financial, insurance, real estate and professional services slowed at 5.7% in the second quarter compared to 7% in the same quarter last fiscal.

Public administration and defence and other services growth slipped to 6% last quarter from 9.5 % in the same quarter last fiscal.