India’s GDP grew at 5.7% between April to June this year — the slowest pace recorded in 13 quarters or since the NDA government assumed office in May 2014 — led by a sharp decline in industrial activity that officials ascribed largely to an inventory drawdown by firms ahead of the rollout of GST from July 1.
Finance Minister Arun Jaitley acknowledged that the growth numbers for the first quarter, which were lower than what most analysts expected, are certainly “a matter of concern.”
GDP growth in the last quarter of 2016-17 was 6.1%, marking a steady decline from the 7.9% clocked in the April to June quarter. The gross value added (GVA) in the economy grew at 5.6%, same as the previous quarter but sharply lower than the 7.6% growth in the first quarter of the last year.
Economist Ajit Ranade pointed out that this is the sixth continuous quarter marking a decline in growth.
“The principal decline in growth is on account of industry, which comes in at 1.6% compared to 7.4% last year,” Chief Statistician TCA Anant said.
Industrial output grew by 3.1% in the previous quarter. Analysts reckoned this to be the worst quarter for the manufacturing sector in five years, with growth at 1.2% compared to 5.3% in the previous quarter and 10.7% in the same quarter last year. That mining activity also shrank by 0.7%, compared to a 6.4% growth last quarter, didn’t help.
Rise in input costs
Dr. Anant stressed that a large part of this dip was due to a rise in input costs as well as an unprecedented “high level of inventory de-accumulation” in the first quarter as firms were worried if the GST regime would grant them input tax credits for output generated before its implementation.
“If this is in anticipation of the GST price-levelling effects, there may be a revival in the stocks in the second quarter. We must keep this in mind when interpreting the manufacturing data,” Dr. Anant said, adding that the negative wholesale price inflation trends in the first quarter of last year, which made growth numbers high, had turned positive.
“…The numbers are consistent with the longer run narrative of decline and since the WPI effect is now working itself out of the system, subsequent periods would restore to more normal levels of growth and you will not see a downfall in growth, which you saw from the second quarter of last year, going ahead,” he said.
While the services sector did fairly well, growing at 8.7% compared to 9% in the same quarter last year, the gross value added by the agriculture sector dipped from 2.5% in the first quarter of last year to 2.3%.
“Even though the crop production side has seen an increase compared to last year, overall agriculture comes in marginally lower because of the other elements of agriculture, which is principally animal husbandry that is slightly lower,” the Secretary in the Statistics and Programme Implementation Ministry said.
Mr. Jaitley said that it is ‘quite obvious’ that the latest growth reading throws up a “challenge for the economy that in the coming quarters we are really required to – both in terms of policy and investment – work more to improve upon these figures.”
The Finance Minister also said that manufacturing has ‘bottomed out,’ services have improved and gross fixed capital formulation has turned positive.
Gross fixed capital formation, which reflect the investments into the country, stood at a four-quarter high of 29.8% of GDP, but was still lower than the 31% clocked in the same quarter of 2016-17.
“Manufacturing appears to have gone down due to the GST impact on destocking. With GST implemented, the curve could turn for the better,” Mr. Jaitley said.
‘Not linked to note ban’
Dr. Anant pointed out that the slowdown in the economy had begun in the second quarter of last year itself, so one can’t link it to the impact of demonetisation.
