GDP growth in line with expectations

The initial prints for gross domestic product (GDP) growth and gross value added (GVA) at basic prices for Q1 FY2017 stand at 7.1 per cent and 7.3 per cent, respectively, largely in line with our expectations. This appears to signal a slowdown in growth relative to the prints for Q4 FY2016.

However, the shifts in the composition of economic activity from one quarter to the next, particularly with regard to the weight of the agricultural sector, lead to sizable statistical peculiarities in sequential growth trends. Therefore, it is more appropriate to compare the growth in Q1 FY2017 with the year-ago quarter (Q1 FY2016) rather than Q4 FY2016.

However, such an analysis throws up mixed results; GDP growth eased to a five-quarter low, despite a sharp rise in government consumption activity and turnaround in exports. Given the contraction in the output of capital goods and the Centre's capital expenditure in Q1 FY2017, and the sluggish investment activity by the private sector, the de-growth in gross fixed capital formation does not come as a surprise.

In contrast, the pace of expansion of GVA improved to 7.3 per cent in Q1 FY2017 from 7.2 per cent in Q1 FY 2016, bolstered by a sizable improvement in the growth of the services sector.

Industrial growth was supported by 9.1 per cent expansion in manufacturing GVA in Q1 FY2017, sharply higher than the anaemic trend revealed by the Index of Industrial Production. This benefitted from the healthy corporate earnings for Q1 FY2017, highlighting that the full impact of the increase in commodity prices was yet to be felt this financial year. In contrast to the trend in Q1 in the previous two years, GDP growth fell short of the rate of GVA expansion in Q1 FY2017. We expect this disparity to have been primarily led by the sharp y-o-y rise in the food subsidy outgo of the Centre in the just-concluded quarter, as opposed to the y-o-y decline in fuel subsidies that had taken place during Q1 FY2016.

The staggered implementation of pay revision by the Centre and a number of state governments, as well as the improved outlook for the rural economy post-monsoon, portend that consumption would remain the chief engine of growth in the coming quarters. Based on this, we continue to expect India's GVA growth at basic prices to improve to 7.7 per cent in FY2017 from 7.2 per cent in FY2016. Signals of capacity expansion by the private sector and a broad-basing of activity in infrastructure are eagerly awaited, which would be crucial to ensure that the uptick in economic growth is durable.

The writer is senior economist at ICRA Limited