India's growth momentum building up

While sustainability of 8% plus growth yet to be established, economic revival post demonetization and GST implementation reaffirmed

Acuité Ratings believes that the growth momentum of the Indian economy has been reinforced with the publication of the GDP print for Q1 FY19. At 8.2%, this is the highest quarterly growth figure over the last three years (since Q2 FY16). The growth is driven by a strong all-round performance in manufacturing and agriculture well supported by a healthy expansion in tax revenues and revenue expenditure. Given that the GDP growth was at 5.6% in the corresponding quarter of the previous year, the growth print has surely benefitted from a favourable base effect; nevertheless, it points to an economic buoyancy which has the potential to add up to 20-30 bps to the GDP growth projection of 7.3% in FY 19 by Acuité Ratings.

One of the significant elements of the growth in Q1 has been its balance and distribution across sectors. The agriculture sector has expanded by 5.3%, which is 230 bps higher than that of the previous year. Strong growth in agriculture sector is primarily attributed to bumper food grain production and improved yields for some crops. The industrial segment, on the other hand, has recorded 10.3% growth in Q1FY19 as against 0.1% in the previous Q1. Manufacturing sector, which is 58% of the industrial segment, has expanded by 13.5% on a base of (-) 1.8% and is therefore, clearly a major contributor of this growth.

The construction sector has expanded by 8.7% (compared to FY18 Q1's expansion of 1.8%) despite RERA led implications for the real estate sector. In the opinion of Acuité, the primary growth driver in this sector is the Government's focus on infrastructure; it has already been estimated that road construction activity has grown significantlyover the last few quarters. This drove the variables such as cement, steel and non-metallic minerals to register healthy double-digit growth - with cement production expanding by 14.2% as compared to (-) 3.3% contraction, same time last year. Mining and quarrying sector, however disappointed, with a registered growth of just 0.1%, despite strong growth in coal production. Acuité attributes this performance to logisticalchallenges which are acting as impediments for the sector. The unpredictable nature of the IIP, which is highly influenced by base effects - is another reason that can be cited for this poor performance. The services sector has been growing steadily above 7% for past three quarters; the strong growth is attributed to the tax revenues expansion, especially after the implementation of the GST. The detailed break-up has been provided in Annexure-1.

Overall, from the aggregate demand perspective, private consumption and public consumption remain the critical pillars of this growth momentum in the Indian economy. The share of private consumption (PFCE), has slightly increased from 54.6% to 54.9% of GDP. Public consumption (GFCE), however added nearly 130 bps to its contribution - currently pegged at 11.8% of GDP. Investments represented by Gross Fixed Capital Formation (GFCF) remained consistent with its contribution - staying at the near 32% of GDP. Acuité understands the impact of the favourable base effect in the latest GDP data from the Q1 FY18 figures which at 5.7%, had recorded the lowest growth rate since Q2 FY16. As this base effect reduces in the coming quarters, the GDP growth figures are likely to witness a moderation. Nevertheless, it believes that the latest growth print is a reaffirmation of a firm revival in the economy post the twin effects of demonetization and GST introduction.

Annexure -1

At Constant Prices (Base 2011-12)

Sectors Jun-17 Sep-17 Dec-17 Mar-18 Jun-18
GVA 5.6 6.1 6.6 7.6 8.0
Agriculture 3.0 2.7 3.1 4.5 5.3
Industry 0.1 6.1 7.1 8.8 10.3
Mining 1.7 6.9 1.4 2.7 0.1
Manufacturing -1.8 7.1 8.5 9.1 13.5
Electricity 7.1 7.7 6.1 7.7 7.3
Construction 1.8 3.1 6.6 11.5 8.7
Services 9.5 6.8 7.7 7.7 7.4
Trade, hotel, & transport 8.4 8.5 8.5 6.8 6.7
Financial services, real estate 8.4 6.1 6.9 5.0 6.5
Public admins 13.5 6.1 7.7 13.3 10.0

Source: CSO

At Constant Prices (Base 2011-12)

  Jun-17 Sep-17 Dec-17 Mar-18 Jun-18
PFCE 54.71 54.55 59.32 54.61 54.91
GFCE 11.84 11.8 10.02 9.52 11.77
GFCF 31.05 30.8 31.57 32.17 31.57
Change in stocks 0.7 0.75 0.71 0.74 0.7
Valuables 2.64 1.91 1.59 1.7 2.24
Net exports -3.27 -2.08 -2.8 -1.39 -3.37
GDP 100 100 100 100 100

Source: CSO

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