Q3 numbers suggest GDP growth is on the right path, finally

India regained its status as the world's fastest growing major economy in the October-December quarter, surpassing China for the first time. Asia's third-largest economy grew 7.2% in the December quarter, its fastest in five quarters. In this Business Standard Special, Madan Sabnavis analyses if the worst is behind Indian economy.

The economy definitely looks to be on the recovery path based on the third quarter (Q3) data presented on gross domestic product (GDP). GDP growth has been fairly well spread across all sectors, which is more important rather than being concentrated, with the services sector dominating. Manufacturing, too, has shown good signs of growth which was expected, given the impressive growth seen in the Index of Industrial Production during this quarter. A boost has also come from the kharif harvest which when put besides the second Advance Estimates of agricultural production does indicate that the number will be sustained for the year.

A major factor affecting these numbers in Q3 was the post-goods and services tax (GST) positive impact, following a downturn when the tax was introduced. Production levels appear to have stabilised as economic agents have adjusted to the new system and have rebuilt their inventory. Further acceleration from hereon would depend largely on demand conditions working out with consumption being the main driver. 

For the year, too, the Central Statistics Office (CSO) is expecting GDP growth to be 6.6%, which would imply that in fourth quarter growth would be in the region of 7.1%. The government once again is to take the lead with 10.1% growth, which is probably the only element which could see a downside risk because given that the fiscal deficit is already 113% of what was targeted for 2017-18, there could be some expenditure cuts in order to balance the Budget with 3.5% fiscal deficit. In the Budget, the government had announced a cut in capital expenditure to the extent of Rs 300 billion in the revised number for FY18 over the budgeted number. Otherwise, the number of 6.4% growth in gross value added looks very much on the cards.

The construction sector performance needs to be highlighted here since it has contributed well to GDP growth, which is a result more of the government focus on roads as the private real estate space has been fairly lacklustre in the year. This is also being corroborated by the core sector data that show cement growing smartly in November-January, which indicates that things will remain positive in the next two months, provided the government does not cut back on expenditure. 

Does this mean that the economy is on a high growth trajectory? Not yet would be the answer as the present performance of the year at 6.6% will still be lower than the growth rates in FY16 and FY17 as the economy is running at less than 7% this time. However, the assurance that one gets here is that the shadows of GST may be receding and that a near-state of normalcy would be reached by March-end. Therefore, 2018-19 could start on a positive note, with no negative policy overhang as was the case in 2017-18, which had to carry the shadow of demonetisation for the first quarter.

The interesting data point on gross fixed capital formation is, however, interesting as the CSO has spoken of a flat number of 28.5% for all the three years. This signifies a significant upward revision from a lower number of 26.4% projected in the first Advance Estimates that needs to be reconciled.  The investment proxy indicators such as finance, new projects, etc. do not tell the same story.

The author is chief economist at CARE Ratings. The views expressed are personal