India registered 8.2% year-on-year GDP growth in Q1 2018-19 period on the back of favorable base effect and rising consumption spending by both government and private sectors.
Although GDP growth pretty much on the expected lines but many analysts are indicating that 8.2% is little too much for the GST and demonetization led crippled economy of India.
Let us analyze the numbers:
GDP’s jump from 5.6% in Q1 2017-18 to 8.2% in Q1 2019-19 look huge but I did not find much to surprise about it. Why, because:
- Favorable base effect – The economy grew 5.6% in Q1 2017-18, giving a boost to current year’s growth numbers.
- Easing GST regime – Continues changes in GST rates and easing implementation process have led to increased formalization of the economy.
- Three major contributing sectors Agriculture, manufacturing and construction showed smart recovery due to increased spending by both private players and government.
- Manufacturing sector saw destocking during the uncertain period before GST implementation during the same quarter last year, so the production activity was under pressure, thus the Q1 2018-19 period growth in manufacturing industry should be largely attributable to base effect.
Let us dig deep into GDP numbers:
Well, I including many analysts have been tracking GVA (Gross Value Added) more carefully than the GDP numbers because GVA indicates the clear state of economy from the producers’ perspective making it more comprehensive and less affected from tax collection numbers. I am not against GDP numbers but as it is generally shows consumer perspective but it is easily impacted by the tax collection numbers. Considering that tax compliance is increase becoming more effective in India since last few years, I find GVA more suitable indicator of economic activity.
If we breakdown the GVA numbers, we can easily gauge the sectoral performance in the economy and access the real picture of the economy which is from the producers’ perspective.
Although base effect has played a major role in reviving the GVA growth in Manufacturing and construction sector but rising spending by the government and private players have contributed equally.
Except Agriculture and Mining sector, all other sector grew more than 6% year-on-year in Q1 2018-19.
- The agriculture sector saw impacts of smart growth in the production of rice, wheat, coarse cereals and pulses during the Rabi season of agriculture.
- Although coal production grew strongly 13.2% during Q1 2018-19, falling oil and natural gas production impacted the overall mining sector.
Thus the numbers look promising to me. The rise in GVA makes perfect sense due to a) base effect and b) growing spending by both government and private players.
Let us also analyze the expenditure of Indian economy which is always characterized under the GDP, showing the consumer side of the economic growth:
Private Final Consumption Expenditure and Government Final Consumption Expenditure as well as Gross Fixed Capital Formation including exports and imports staged smart recovery in Q1 2018-19 and each rose above 7%, contributing largely to growth in GDP.
Well, all in all, the Q1 2018-19 GDP and GVA numbers look promising with most of the economic indicators moving in the upward direction.
It will be really interesting to see if India manages to growth above than 8% in the next few quarters under the current uncertain environment of currency weakness and rising crude oil prices.