The provisional estimates of the gross domestic product (GDP) for the first quarter of the current financial year, released by the Central Statistics Office on Wednesday, have dampened the expectations of an economic recovery. The GDP for Q1 FY17 has been pegged at 7.1 per cent — this is the slowest growth over the past five quarters. This is in sharp contrast to the 7.9-per cent growth registered in the fourth quarter of the last financial year, which gave a huge boost to India’s status as the fastest growing major economy in the world. The lower than expected growth rate – most industry estimates had ranged between 7.4 per cent and 7.8 per cent – makes the task of achieving eight-per cent growth for the full year a tad more difficult, even as it presents a dilemma for the incoming governor of the Reserve Bank of India (RBI), who takes over when there is rising inflation and decelerating growth.
One of the key reasons for the dip is agriculture. As against the expectations of 2.2-per cent growth, this sector has grown by just 1.8 per cent — again, significantly lower than the 2.6-per cent growth in the first quarter of the last financial year. This has come in the wake of advance crop estimates that had showed a good rabicrop. Mining and quarrying as well as construction are the two other sectors that have registered sharp falls. The former has contracted by 0.4 per cent in Q1 as against growth of 8.5 per cent in the same quarter in the last financial year. The latter has grown by just 1.5 per cent as against 5.6 per cent in Q1 FY16. However, both manufacturing and electricity and other utilities have registered an uptick. It is noteworthy in this context that the pace of growth in the index of eight core sector industries for July, according to the data released on Wednesday, too, has slowed down.
Perhaps the worst bit of news within the overall numbers is the contraction witnessed in gross fixed capital formation. One of the worrying aspects of near eight-per cent growth in Q4 FY 16 was the fact that GFCF had contracted by 1.9 per cent. This quarter, the pace of that contraction has increased to 3.1 per cent. This clearly shows that while the economy is growing, it is not triggered by a recovery in investments; rather, investment is shrinking. The RBI’s annual report earlier this week did not mince words and said industrial growth has stagnated and more importantly will not pick up any time soon. The RBI, in fact, said there are no strong discernible drivers of the economy for the year and that investment will not be increasing significantly in FY17, the main reason being that private investment has not picked up and government expenditure has not been fast enough to pull the growth trigger.
There are still several reasons why India may recover to register a growth rate close to eight per cent in the full year. Three factors stand out in particular. One, as the full impact of a good monsoon takes over by the time the kharifharvest happens later this year, agriculture is likely to provide a boost to incomes and spur demand growth in the rural economy. Two, the award of the Seventh Pay Commission is expected to trigger a similar boost to demand in the urban sector. However, these will spring into action only in the third and fourth quarters of the current financial year. Till then, everyone will have to keep their fingers crossed.
