Q2 GDP growth signals economic revival post demonetisation and GST implementation

Indian economy has witnessed a growth revival with a 6.3% growth in GDP in Q2 FY18 as against 5.7% in the previous quarter. This is fairly in line with SMERA Ratings’ expectation for GDP growth, which was 6.4% for the quarter and 6.8% for the entire financial year, 2017-18. While economic performance in the past few quarters has been muted given the impact of demonetisation and GST implementation, there are signs of a steady revival. Over the past few months, the industrial index of production (IIP) has been indicating a recovery - especially in sectors pertaining to steel, electricity and manufacturing.

SMERA believes that the Q2 print was crucial to understand the underlying effects of the GST implementation. The quarterly GDP growth figure reflects that the economy has started to align with the GST with visible volume growths across certain heavyweight sectors such as steel. Moreover, the reduction in rates on 215 items last month is likely to boost private consumption and strengthen growth prospects in H2 FY18 (please refer to our press release dated Nov. 13, 2017). The firm up in the inflation figures has started to reflect a pick-up in both public and household consumption.

SMERA has undertaken an analysis of sector-wise growth trends to obtain deeper insights from the economy.

Sector wise growth in GVA at basic price:

Sep-16

Jun-17

Sep-17

Share in GVA growth (bps)

Share in overall GVA (%)

GVA

6.8

5.6

6.1

1000

100

Agriculture

4.1

2.3

1.7

32

11.12

Overall Industry

5.9

1.6

5.8

293

30.63

Mining & quarrying

-1.3

-0.7

5.5

22

2.36

Manufacturing

7.7

1.2

7.0

209

18.36

Electricity*

5.1

7.0

7.6

28

2.24

Construction

4.3

2.0

2.6

34

7.66

Overall Service

7.8

8.7

7.1

675

58.25

Trade, hotel, **

7.8

11.1

9.9

299

18.95

Financial, real estate #

7.0

6.4

5.7

245

25.98

Public admin ##

9.6

9.5

6.0

131

13.32

Source: MOSPI, SMERA Knowledge Center

Note: * includes Electricity, gas, water supply & other utility services

** includes trade, hotel, transport, communication & services related to broadcasting

# includes 7 financial, insurance, real estate &professional services

## includes public administration, defence & other services

Weakness in real estate and construction constrain services but pick up seen in trade and transport

One of the major segments in the services sector - financial, real estate, and professional services, which accounts for 26% in overall GVA continue to remain subdued at 5.7%. This sector has the potential to grow in double digits as witnessed during FY13 to FY16. The real estate sector in particular has seen signs of weakness post implementation of Real Estate (Regulation and Development) Act, (RERA) and the demonetisation event last year. While the Housing Price Index has recorded an over 6% growth combined with healthy retail loan performance, inventories are still plaguing the system and new construction activities have been limited. The construction sector has also recorded a weak 2.6% growth in value added in Q2 FY18 as compared to 4.3% in Q2 FY17. Clearly, this had an impact on the cement sector which contracted by (-)2.7% in October 2017 and (-)1.6% in the April-October 2017 period. SMERA believes that the construction sector can revert to a healthy growth track with the impetus being provided to the infrastructure sector and the gradual alignment of the real estate market to RERA. Specific measures to revitalize the real estate sector would also help to push up construction activities and enhance employment opportunities for unskilled labour.

Interestingly, it is observed that the trade, hotel and transport segment has advanced by 9.9% in Q2 FY18 as against 7.7% during the same quarter the previous year. This segment accounts for 19% in overall GVA with improved transparency in the system having made tracking and recording the real value added in these sectors easier. SMERA believes that the implementation of GST would increase the coverage of these sectors in GVA in a significant manner.

Improvement in manufacturing visible, inventories still crowding out new volumes

On the industrial side, manufacturing activities have picked up the pace expanding by 7.0% during the reference period as compared to 1.2% value added growth last quarter. Cheaper imports and the implementation of GST has had its impact on the domestic manufacturing sector in the previous quarter. While the sustainability of this recovery is to be seen, there is strong evidence that the sector is moving up the value chain – producing lower units of a higher value.

While the Consumer Durables category continues to be in contraction mode, the Consumer Non-Durables category has begun to show positive growth signs. A contraction in the Consumer Durables category despite the improvements in Capital Goods and consumption patterns brings back the high systemic inventory factor. Like the real estate market, it is likely that inventories are crowding out new production for the category. It remains to be seen how this sectoral GVA aligns with volumes over H2 FY18 before finally assessing the health of manufacturing in the new tax regime.
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