Elephant starts running: Q1 GDP growth soars to 9-quarter high of 8.2%

The services sector grew at a slightly slower pace of 7.3% in Q1FY19

Spurred by manufacturing, India’s economic growth rose to a nine-quarter high of 8.2 per cent in the first quarter of 2018-19, surpassing analysts’ expectations.

Gross domestic product (GDP) had earlier grown by 7.7 per cent in Q4FY18.

With China's growth coming down to 6.7 per cent in April-June 2018 from 6.8 per cent in January-March of the year, India remained the fastest-growing large economy in the world.

Manufacturing grew at a nine-quarter high of 13.5 per cent largely owing to a low base effect, while the services sector expanded at a slower pace.

However, economists remained sceptical of sustaining the growth momentum in the coming quarters. But, not the government, which now expected that even its projections of up to 7.5 per cent growth in FY19 may be crossed.

Finance Minister Arun Jaitley tweeted, “More India’s GDP for the first quarter this year growing at 8.2 per cent in otherwise an environment of global turmoil represents the potential of New India.”

On the expenditure side, the economy was driven by domestic demand. Jaitley said: “Reforms and fiscal prudence are serving us well. India is witnessing an expansion of the neo middle class.”

Economic Affairs Secretary Subhash Chandra Garg said the robust performance this quarter gave hope that growth could exceed even estimates of 7.5 per cent this fiscal year.

He said the V-shaped recovery of growth in the Indian economy was complete now. "We should grow at a robust and steady state in 2018-19, remaining the fastest-growing economy in the world,” he said.

Part of the spurt in growth can be traced to a low base effect as the economy was held back by the twin shocks of the GST and demonetisation in the previous year.

Manufacturing had contracted by 1.8 per cent in Q1FY18 as companies resorted to de-stocking ahead of the shift to the GST.

Similarly, construction, whose growth had plummeted to 1.8 per cent in Q1FY18, rose to a healthy 8.7 per cent in Q1FY19. 

Agriculture and allied activities also registered an impressive 5.3 per cent growth rate in Q1FY19, up from 4.5 per cent in Q4FY18, on the back of a surge in production.

The fourth advance estimates of production of major crops showed that production rose to staggering 284.83 million tonnes for agricultural year 2017-18 (July to June), up from 279.51 million tonnes as indicated by the third advance estimates.

The services sector grew at a slightly slower pace of 7.3 per cent in Q1FY19, down from 7.7 per cent in Q4FY18.

Part of this slowdown can be traced to slower growth in public administration, defence and other services, which largely connote government spending. The segment grew by 9.9 per cent in Q1FY19, down from 13.3 per cent in Q4FY18.

“The services segments — trade, transport, finance, real estate, etc. — have registered lower growth rates compared to last year, where the base effect has worked in the reverse direction,” said Madan Sabnavis, chief economist, CARE.

On the expenditure side, household demand as measured by private consumption expenditure grew at a healthy 8.6 per cent in Q1FY19, up from 6.7 per cent in Q4FY18.

“Pay Commission/HRA revisions at the state level, where government employee strength is higher than at the Centre, will also provide a transitory boost to consumption demand,” said DK Joshi, chief economist, CRISIL.

Gross fixed capital formation (GFCF), which connotes investment activity in the economy, grew at 10 per cent in Q1FY19, lower than the 14.4 per cent in Q4FY18, benefitting from a 27.4 per cent rise in the central government’s capital expenditure in the first quarter and a 9.5 per cent rise in the capital goods segment in the index of industrial production (IIP). But it rose as a share of GDP.

“An encouraging sign is the marginal uptick in the GFCF rate (at current prices) picking up from 28.7 per cent to 28.8 per cent. We may have to wait to see if this can be sustained as often there are slippages subsequently,” noted Sabnavis.

“Investments will continue to look up (driven by government-led efforts to get roads and houses built), but a broad-based investment recovery led by the private sector is hampered by capacity overhang, high leverage, and political uncertainty,” said Joshi. 

While the growth numbers for the first quarter are encouraging, analysts remain sceptical about the economy maintaining this growth trajectory in the coming quarters. 

“We expect growth to be 7.5 per cent for the full year. Given the challenges of higher interest rates, a weak rupee, oil price concerns, etc, we may expect some moderation in growth in the next few quarters,” Sabnavis said.

Other economists concurred, though not the government.

Union Finance Secretary Hasmukh Adhia said: “The GDP growth rate of 8.2 per cent for the first quarter of 2018-19 indicates several structural reforms such as the GST have started giving rich dividends. Growth in manufacturing (13.5 per cent) also indicates broad-based recovery of demand.”

These estimates represent a significant jump from last year’s Q1 growth rate estimates of 5.6 per cent, indicating superior acceleration in India’s growth trajectory, noted the Economic Advisory Council to the Prime Minister.

“Some concerns linger on the sustainability of growth of around 8 per cent in the remaining quarters of FY2019, given the base effect, risks posed by higher crude oil prices, interest costs and a weakening rupee, as well as fiscal constraints,” said Aditi Nayar, principal economist at ICRA.

“Growth will be stronger in the first half compared to the second as the favourable base effect will begin to wear off after the second quarter,” noted Joshi.