In fall season, GDP latest to sputter: growth slows to 7% vs 7.5% in Apr-Jun

A little more of the Modi-magic faded on Monday with the national income in the April-June quarter expanding at a much slower rate of 7% compared with the previous quarter growth of 7.5% as investment and consumer spending dipped.

The latest blow to the National Democratic Alliance (NDA) government comes on the heels of slackening economic reforms due to its inability to push them through and a "doubtful" monsoon.

The GDP number released by the government showed that the manufacturing sector grew at 7.2% in the first quarter of the current fiscal compared with 8.4% in the previous quarter.

Infrastructure sector growth took the biggest hit by slowing to three-month low of 1.1% in July this year compared with 4.1% growth in the previous year as output of crude oil, natural gas and steel contracted.

Inflation-adjusted private final consumption expenditure (PFCE), a metric to gauge family spending, stood at 58.7% of GDP in during the quarter, barely higher than the previous year's 58.5%.

Shop-end data also show that households were not buying goods at a pace to pull growth in the broader economy. Car sales, for instance, have grown at a muted 7.4% during in 2015-16 so far.

Farm income barely grew at 1.9% during the quarter compared from the previous quarter's 1.4% contraction, hit by a lingering bad winter of hailstorms and unseasonal rains in March. The agriculture sector had grown by 2.6% during April-June last year.

Inflation-adjusted gross fixed capital formation (GFCF), a proxy to measure firm-level investment activity, slowed down to 29.8% of GDP in April-June this year, compared to 30.4% in the same quarter of the previous year.

Muchkund Dubey, former ambassador and Indian foreign secretary who has authored many books on India, said he was not surprised by the lower-than-expected economic growth rate.

"I am not at all surprised because there has always been doubt about the sudden increase in the GDP from 5.4% to over 7% by including more items in it. This has never been explained properly but once you have included the item and it gets repeated then real growth becomes evident," he said.

Government recently changed its formula for measuring national income that included many more activities from farm livestock to mega infrastructure projects.

Dubey said that if the current macroeconomic conditions were to be taken into consideration then the GDP growth of 5.4% was more reflective of the fundamentals than 7%.

According to him, the 9-10% growth that the government was talking was a bit farfetched despite India having a much higher scope for growth compared with other developing countries.

"We are least developed among the developing economies, so there is much more scope for growth compared to our peers. However, I don't see justification in all this thing that we will reach 9-10%. I think the longer term trend (of GDP growth) will be more or less in the range of 6-7%, which I don't think is a bad rate of growth," said Dubey.

He said one of the reasons India was not able to reach high economic growth rate was because it never went about building a sustainable basis for growth; "unless there is complete restructuring of defence, education and infrastructure sectors and so long as these constraints are with us, we can never think of very high growth rate".

A lower-than-expected GDP number in the June quarter means the government will have to work harder to achieve its current fiscal goal of 8-8.5% growth.

Amit Kumar Sarkar, partner, Grant Thornton India LLP, said the 8-8.5% growth for the year to March, at the moment, seemed "impossible". He felt the optimism among investors was fading along with frustration rising.

"The frustration (among investors) is rising because reforms are not being pushed at a pace which it was expected," he said.

Sarkar said government is, generally, the biggest spender in an economy but it had yet to begin doing that.

"Till now, we have not seen the government spending in big way. It started only recently with smart cities. There was going to be huge spending on Swachch Bharat initiative. Not much has happened on that too till now," he said.

Sarkar said the adverse market condition has also put the spanner in the works for the government's public sector undertakings' (PSUs) disinvestment plans.

"Even though the divestment (in state-owned firms) has started, the market sentiment is not right. The government was forced to sell its crown jewel PSU stock like IOC (Indian Oil Corporation) at a discount," he said.

A subdued growth rate and reined in inflation have raised hopes of many for an interest rate cut by the central bank in its monetary policy review. Sarkar, however, felt a rate cut at this moment, when monsoon was doubtful, would only expand money supply in the economy and fuel inflation.

Finance minister Arun Jaitley also raised the pitch for a rate cut on Monday, along with other government pleading for as much as 50 basis points slash in the current policy rate of 7.25%. Till now, the Reserve Bank of India has snipped 75 basis points since the beginning of the year.

The central bank governor Raghuram Rajan has hinted that any rate cut would come only after taking into consideration the inflation outlook.