What next after mining, manufacturing pull down GDP data?

At the end of the day, the Central Statistics Organisation (CSO), which released the gross domestic product (GDP) data for the July-September quarter of 2018 on Friday, proved that all forecasters were a little optimistic.

The final official print was a few decimal points lower than what the country’s top institutions had forecast. The consensus estimate (based on forecasts by SBI, CRISIL, CARE Ratings, India Ratings and ICRA) had put the GDP growth figure at 7.4 per cent. 

CSO’s figure was 7.1 per cent, much lower than the 8.2 per cent figure for the April-June quarter of 2018. The forecaster’s optimism was seen even for the gross value added (GVA) numbers. GVA in basic prices grew by 6.9 percent, a drop from 8 per cent in the previous quarter. 

What contributed to the deceleration in India’s economic growth in the second quarter of 2018-19 was contraction in mining and a sharp drop in manufacturing.

Mining and quarrying had begun showing weakness from the third quarter of last year. It grew by just 0.1 per cent in the April-June quarter of 2018, and contracted by 2.4 per cent in July-September 2018. 

Crude oil and natural gas were responsible for the poor show in mining and quarrying. They fell by 4.4 per cent and over 2 per cent, respectively, this quarter. This was so steep that even a 6 per cent rise in coal could not help the mining sector recover from the contraction seen in crude oil and natural gas. 

The sharp deceleration in manufacturing was not unexpected. Thanks largely to a base effect, manufacturing had recorded double-digit growth at 13.6 per cent in the first quarter this year. But the second quarter of 2018-19 has now seen a significant drop in manufacturing growth to 7.4 per cent. 

Experts have pointed out that the festival sales have not been captured in the second quarter numbers as this year the festival season, when sales usually see a pick-up, started a little late by the middle of October. The third quarter numbers would reveal if this hypothesis is correct or there are some other reasons contributing to these relatively low numbers. 

Since the contraction of 1.8 per cent in the first quarter of last financial year, manufacturing growth has been steadily rising. This is the first time in the last five quarters that the manufacturing growth has seen a deceleration. 

Agriculture, riding on kharif harvests, did better with 3.8 per cent, compared to the same quarter of 2017-18. What helped was the fact that livestock products, forestry and fisheries, which account for about 55 per cent of the agriculture GVA, grew by a healthy rate of 6.7 per cent. 
Electricity and other utility services have seen a pick-up and construction has maintained steady growth at close to 8 per cent. 

The financial services sector has notched up a growth rate of 6.3 per cent, compared to 6.5 per cent in the previous quarter and 6.1 per cent in the second quarter of 2017-18. These numbers have not yet captured the stress this sector have been going through from October. The growth numbers for the financial services sector will need to be watched for the third quarter of the current year. 

On the investment front, the CSO figures offer some relief. Gross fixed capital formation in the July-September quarter of 2018 maintained its steady uptrend and was estimated at 32.3 per cent of GDP, compared to 31.6 per cent in the previous quarter. 

How difficult or easy will it be for the Indian economy to achieve a growth rate of 7.4 per cent for the full year, as projected by the Reserve Bank of India? The GDP growth figure for the first-half of the current year comes to about 7.6 per cent. A Bloomberg poll of economists has put the GDP growth estimate for the second half of the year at 7.5 per cent. Will the economy perk up in the second half?

The big imponderable is how the Indian economy will fare in the October-December 2018 quarter, which will reflect both the stress in the financial services sector as also the corporate sector’s festival earnings. A clear answer to that question will be available only on February 28, 2019. 

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