India’s GDP Growth Slows Sharply In Fourth Quarter

India’s economic growth slows due to weakness in construction and finance segments.

Laborers work at the construction site. (Photographer: Dhiraj Singh/Bloomberg)
Laborers work at the construction site. (Photographer: Dhiraj Singh/Bloomberg)

Fears of a slowdown in the economy, which, so far, have been tough to prove are now showing up in economic data.

National income data released on Wednesday shows that gross value added (GVA) growth slowed sharply in the fourth quarter to 5.6 percent, compared to 6.7 percent in the third quarter. Growth in the fourth quarter of fiscal 2017 is also much lower than the 8.7 percent growth reported in the fourth quarter of fiscal 2016.

GVA growth has become a preferred measure of economic growth as it strips out the impact of indirect taxes and subsidies. Gross domestic product (GDP) growth, a more commonly used measure, suggested that growth in the fourth quarter of fiscal 2017 stood at 6.1 percent while full year GDP growth stood at 7.1 percent.

For the full fiscal year, GVA growth stood at 6.6 percent compared to 7.9 percent in fiscal 2016. The data released today captures the impact of the revised series of the Wholesale Price Index (WPI) and the Index of Industrial Production (IIP).

India’s GDP Growth Slows Sharply In Fourth Quarter

What Happened In The Fourth Quarter?

On a year-on-year basis, break-up of the GVA data shows that all sectors, with the exception of agriculture and the public administration segment, saw a sharp slowdown.

  • The mining sector grew at 6.4 percent compared to 10.5 percent last year.
  • Manufacturing growth slowed to 5.3 percent from 12.7 percent.
  • Construction saw a degrowth of 3.7 percent compared to a growth of 6 percent in the fourth quarter of the previous financial year.
  • Growth in the finance sector slowed to a mere 2.2 percent compared to 9 percent in the year-ago period.
  • Agriculture growth strengthened to 5.2 percent compared to 1.5 percent last year.

The comparison between the fourth quarter of 2015-16 and 2016-17 may look starker because of the base effect which would kick in due to higher growth in the comparable period from a year ago. If you strip that out, the national income data tells a story of an economy that has been slowing steadily over the course of fiscal 2017, only to deteriorate sharply in the fourth quarter.

The slowdown seems to have partly emerged from the manufacturing sector where growth slipped to 5.3 percent in the fourth quarter compared to 8.2 percent in the third quarter. The construction sector saw negative growth of 3.7 percent in the March-ended quarter compared to 3.4 percent in the third quarter. Even the finance sector saw growth slip to 2.2 percent in the fourth quarter from 3.3 percent in the third quarter and 7 percent in the second quarter.

When asked whether this slowdown is attributable to the fallout of demonetisation, which led to the withdrawal of 86 percent of the country’s currency in circulation, the country’s chief statistician said it is difficult to attribute reasons to the slowdown.

It is not so straight forward to link third quarter and fourth quarter GDP numbers to demonetisation. Other dynamics should be kept in mind too.
TCA Anant, Chief Statistician Of India

Arvind Subramanian, chief economic adviser to the government said that there has been a deceleration in the economy starting July, based on the trajectory of the industrial output and national income data. The slowdown in the fourth quarter may be partly due to the base effect and also due to the shortage of currency which emerged after demonetisation.

I would say that broadly the data is consistent with what we said in the economic survey. The quarter which you’d expect to be the weakest is the fourth quarter because that’s when, if you did the arithmetic correctly on how the monetary aggregates​ were behaving, the fourth quarter would be the one which would have the biggest impact. We had also said  that it would bottom out as remonetisation takes place. I think we can see some signs of bottoming out and a recovery in the nominal aggregates which, in fact, did pick up in the fourth quarter.
Arvind Subramanian, Chief Economic Adviser
India’s GDP Growth Slows Sharply In Fourth Quarter

Clues From The Expenditure Side

The expenditure side of the gross domestic product data for the fourth quarter tells a story of an economy where investment and consumption growth slowed but government expenditure rose.

Personal final consumption expenditure, a broad measure of consumption growth, saw an uptick of 7.3 percent in the fourth quarter over the last financial year. In the third quarter, this segment grew at 11 percent, suggesting some sequential slowdown in consumption in the economy.

Gross fixed capital formation, a measure of investment growth, showed a decline of 2 percent in the fourth quarter over last fiscal. The first three quarters of 2016-17 had shown positive growth in gross capital formation, based on the revised data series.

As such, government spending continued to be the biggest support to growth.

Demand and purchases during the festive season and a favorable base effect appear to have couched the impact of the note ban on consumption growth in Q3 FY2017, which was followed by a sharp dip in Q4 FY2017. The year on year growth in gross fixed capital formation recorded a sharp deterioration over the course of FY2017, culminating in a 2.1 percent contraction in Q4 FY2017, reinforcing the assessment of the prevailing lull in investment activity. The sharp expansion in government consumption expenditure in Q4 FY2017, bolstered GDP growth from an even sharper slowdown.  
Aditi Nayar, Principal Economist, ICRA

Policy Implications

The slowdown in the economy suggested by the GVA data will put greater pressure on the Reserve Bank of India (RBI) to explain its recently tightened monetary policy stance.

In February, the central bank had moved from an ‘accommodative’ policy stance to a ‘neutral’ stance, citing upside risks to inflation. Since then, the consumer price index has pegged inflation at near 3 percent in April, well below the RBI’s medium term target of 4 percent.

The lower-than-expected inflation, together with weakening growth, could prompt calls for a relook at the RBI’s policy stance.

Madan Sabnavis, chief economist at CARE Ratings, however, thinks the RBI will keep its eyes on inflation to see whether upside risks to price pressures materialise. Going forward, the rating agency expects growth to be in the region of 7.6-7.8 percent on the back of higher government spending and some pick in consumption and investment.