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GDP growth comes at the cost of drop in plan expenditure

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Amid positive sentiments from select industrial sectors after a stable government with a single-party majority came into power, India's gross domestic product (GDP) recorded a significant jump in the April-June quarter.

While the GDP growth of 5.7% -- the fastest quarterly growth in over two years -- may have spurred an overall investment climate, the growth has come at the cost of drop in productive expenditure from the government.

The drop in planned expenditure by 12%, a weak base and a slight uptick in industrial growth, which was negative last year, helped expand the GDP growth.

Aditi Nayar, economist with ratings agency Icra, said, "At an absolute level, the fiscal deficit in April-July 2014 is 5% narrower than the level in the first four months of 2013-14. This partly reflects an 11% contraction in non-interest expenditure, which is a cause for concern. In particular, plan expenditure in April-July 2014 was 12% lower than the year-ago period, highlighting that productive expenditure is yet to pick up."

According to the details put out by the Ministry of Statistics, economic activities that registered a significant growth in first quarter over Q1 of 2013-14 are 'electricity, gas & water supply' at 10.2%, 'financing, insurance, real estate and business services' at 10.4% and 'community, social and personal services' at 9.1%. During the quarter, other economic activities reported include 4.8% growth in 'construction', 3.5% in 'manufacturing', 2.8% in 'trade, hotels, transport and communication', 3.8% in 'agriculture, forestry & fishing', and 2.1% in 'mining & quarrying'.

D K Joshi, chief economist at rating agency Crisil, said, "The GDP growth is on a weak base. Significant growth came from segments like electricity where availability of coal is a major issue, so it needs to be sustained. The growth came also came from industrial activity and a good monsoon last year resulted in good agricultural production."

According the Ministry of Statistics, "The Index of Industrial Production (IIP) the indices of mining, manufacturing and electricity, registered growth rates of 3.2 %, 3.1 % and 11.3 5%, respectively during the first quarter of 2014-15, as compared to the growth rates of (-) 4.6 %, (-) 1.1 % and 3.5 % in these sectors during Q1 of 2013-14."

"I think we have crossed the difficult situation that the country was facing," Prime Minister Narendra Modi told reporters in Tokyo. "Within the first 100 days of this government, we have achieved stability and stopped the continued reversals that the country was facing. We have to move ahead now on the runway; I am confident that, very soon, we will attain even greater heights."

The key indicators of construction sector, namely, production of cement and consumption of finished steel registered growth rate of 9.5% and 0.7%, during Q1 of 2014-15. Among the services sectors, the key indicators of railways, namely, the net-tonne kilometres and passenger kilometres have grown. In other transport sectors, passengers and cargo handled by the civil aviation, and cargo handled at major ports registered growth rates of 7.5% and 6.2% and 4.3%, respectively, while the sales of commercial vehicles declined 16.1% during Q1 of 2014-15 over Q1 of 2013-14.

However, bank credit and deposit growth has dipped. Aggregate bank deposits, and bank credits posted growth rates of 12.4% and 13.3%, respectively as on June 2014 as against growth of 13.5% and 13.7%, respectively as on June 2013.

The finance ministry expects the pace of growth to hasten.

"With improvement witnessed in some important sectors including manufacturing as well as in the performance of exports (that registered a growth of 11.5% at 2004-05 prices), along with the measures taken by the government, the economy can be expected to show further improvement in the remaining part of the year," the ministry said in a statement.

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