The most important takeaway is that growth in capital expenditure contributed more to GDP growth than increase in consumption
Manas Chakravarty
Is the fall in real GDP growth from 8.2 percent in the June quarter to 7.1 percent in the September quarter really a reason for worry? Which parts of the economy are doing well and which are doing badly? We list below some of the main trends:
- The most important takeaway is that growth in capital expenditure (known as gross fixed capital formation in the GDP data) contributed more to GDP growth than increase in consumption. That’s a huge change and it’s time for investors to take a closer look at cyclical stocks, including banks.
- There has been a clear slowdown in private consumption. Growth in private consumption fell from 8.6 percent in the June quarter to 7 percent in the September quarter. What’s more, the slowdown in growth has happened despite a slightly favourable base effect. Higher oil prices and rural distress seem to have been a drag on consumption. The GDP numbers are telling us that the driver of the economy is changing from consumption to capex and investors may need to adjust their portfolios accordingly.
- Did the depreciation of the rupee during the previous quarter help exports? Yes it did, but only a bit. Export growth was 13.4 percent in the September quarter compared to 12.7 percent in the June quarter. It’s possible that the impact of rupee depreciation will be seen with a lag, but that hope could be snuffed out now that the rupee has rebounded.
- Total domestic demand or consumption plus investment demand has held up pretty well --- it was the external sector that dragged down GDP growth. Higher oil prices during the September quarter led to a bloated import bill. Although growth in exports did pick up a bit, the net impact was that the contribution of the external sector to GDP growth during the September quarter was hugely negative, pulling down growth.
- Government expenditure accounted for a substantial chunk of GDP growth in the September quarter. This is important because data shows that by October-end the Centre had already overshot its fiscal deficit target. If the government plans to stick to its target, the scope for further stimulus doesn’t exist. In other words, if the private sector doesn’t step up its consumption or investment, then growth could get affected in subsequent quarters.
- In the Gross Value Added data, there’s no need to read too much into the slowdown in manufacturing growth from 13.5 percent in the June quarter to 7.4 percent in the September quarter because there is a substantial adverse base effect.
- There was however a big positive base effect for ‘financial, real estate and professional services’, despite which growth in the sector slowed a bit. Since the IL&FS debacle and its aftermath happened mostly in the quarter gone by, it’s likely its impact will lead to a further slowdown in this sector.
- The GDP deflator for agriculture, a broad yardstick of overall inflation in the sector, was a negative 1.3 percent for the September quarter, indicating deflation in the sector. In the June quarter, this measure of inflation in the sector was a positive 1.4 percent, which indicates deepening distress in the farm sector. If not corrected by higher support prices, this could have political repercussions. Growth in the construction sector has slowed, but it’s not a matter of concern, because it is due to the base effect. The construction sector is an important source of jobs for the masses.
- Slowdown in GDP growth will very likely reinforce the Monetary Policy Committee’s decision not to raise interest rates at its meeting this week.
- Finally, we must remember that the GDP data is backward looking and what matters for the market are expectations of future growth. While trends in the numbers provide clues to the future, the sharp fall in crude oil prices in the current quarter, if sustained, will lower the trade deficit and drag from the external sector and boost growth in subsequent quarters.
