Q3 GDP Data: India’s Economy Continues To Rebound

India’s GVA grew at 6.7 percent in Q3, while GDP grew at 7.2 percent.
A worker walks along the dock as materials are unloaded from a ship, not pictured, at Krishnapatnam Port in Krishnapatnam, Andhra Pradesh, India (Photographer: Dhiraj Singh/Bloomberg)  
A worker walks along the dock as materials are unloaded from a ship, not pictured, at Krishnapatnam Port in Krishnapatnam, Andhra Pradesh, India (Photographer: Dhiraj Singh/Bloomberg)  

India’s economy picked up pace in the October-December period as it continues to recover from the twin disruptions of demonetisation and a nationwide goods and services tax.

The gross value added growth stood at 6.7 percent in the third quarter of 2017-18 compared with a revised 6.9 percent in the same period last year and a revised 6.2 percent in the previous quarter, according to data released by the Central Statistics Office today. A Bloomberg poll of economists had pegged GVA growth at 6.7 percent.

GVA has become a preferred measure of economic growth as it strips out the impact of indirect taxes and subsidies. The more commonly tracked gross domestic product growth stood at 7.2 percent compared with a revised 6.5 percent in the second quarter.

“The shadows of demonetisation and GST may be behind us,” said Madan Sabnavis, chief economist at CARE Ratings said. While the disruptions may be over, it may be too soon to say the economy is accelerating, he said.

The Indian economy was hit by twin shocks of a cash purge and GST over the past 18 months, disrupting economic activity which has only now started to rebound. A modest revival in the investment cycle along with a pick-up in exports is expected to support this “nascent” recovery, the RBI had said.

India is now expected to grow faster than estimated in 2017-18. GVA growth for the full year is seen at 6.4 percent compared to 6.1 percent forecast in the first advance estimates. GDP too is expected to grow 6.6 percent in the year ending March 2018—10 basis points higher than January estimates. That may provide some reprieve to Prime Minister Narendra Modi ahead of the Lok Sabha election in 2019.

Yet, the expected GVA growth is still lower than the 6.7 percent India recorded in the previous year and the GDP estimate is 50 basis-points lower than last year. “Something substantial will need to be done next year if the government wants to cross the 7 percent mark,” said Sabnavis.

It will still be too early to rejoice and think that we’re on an accelerated growth path. A lot would depend upon how demand conditions behave in the fourth quarter and subsequently in 2018-19.
Madan Sabnavis, Chief Economist, CARE Ratings.

Sectoral Breakdown

  • Growth in the farm sector in Q3 stood at 4.1 percent compared with 2.7 percent in Q2.
  • The manufacturing sector grew at 8.1 percent versus 6.9 percent.
  • The construction sector grew 6.8 percent versus 2.8 percent.
  • The financing, real estate and insurance segment grew at 6.7 percent compared to 6.4 percent.
  • Mining sector contracted 0.1 percent from a 7.1 percent growth in the previous quarter.
  • The government spending-linked public administration segment grew at 7.2 percent versus 5.6 percent.

Some of the sectoral data, especially the sharp pickup in agriculture is “puzzling”, according to Japanese brokerage Nomura said in a note. “Overall, the growth data are a positive surprise and confirm a cyclical recovery, led by rising investment demand, but growth in private consumption demand is slowing.”

The more sustainable capital expenditure-driven recovery is yet to come, Sonal Varma, managing director and Chief Indian Economist at Nomura told BloombergQuint in an interview.

We do not want another two or three quarters of high growth and then falling down again. The more sustainable recovery is probably some time down the line. But yes, we should enjoy this recovery.
Sonal Varma, Managing Director & Chief Indian Economist, Nomura.

Private investments continue to pick up as the gross fixed capital formation grew at a multi-quarter high in the third quarter. Government spending rose as well. Private consumption, however, weakened.

  • Gross fixed capital formation grew at 12 percent year-on-year in Q3 compared to 6.6 percent in Q2.
  • Private consumption expenditure at constant prices grew by 5.6 percent versus 6.5 percent in Q2.
  • Government consumption expenditure grew at 6.05 percent compared to a weak 2.9 percent in Q2.

The 12 percent growth in fixed capital formation is what pulled up the GDP growth and “the need of the hour is how we can nurture this budding investment revival with conducive policies”, according to Devendra Kumar Pant, chief economist at India Ratings and Research.

Given the growth momentum and the inflationary risks, RBI is expected to stay in pause mode for a few quarters, Pant said in an emailed statement. “Thereafter, it will depend on growth-inflation dynamics shaped by both evolving domestic and external conditions, particularly oil prices.”

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