Q3 GDP indicates recovery in economic activity
By invitation: NR Bhanumurthy & Ranjan Kumar Mohanty

The Central Statistics Office (CSO) has released both the second advance estimates as well as Q3 estimates of the gross domestic product (GDP) for 2017-18. While the second advance estimates is marginally higher than the first advance estimates, it is interesting to know a sharper increase in the third quarter GDP to 7.2 per cent compared with 6.5 per cent in the second quarter. This is higher than 6.8 per cent growth registered in the same period last year.

At the disaggregated level what is more interesting is the sharp increase in the growth of investment (GFCF) (from 4.7 per cent in Q2 to 12 per cent in Q3) despite the disturbances due to the implementation of goods and services tax (GST). This also suggests an overall recovery in the economic activity in the country.

Similar trends are also visible in the estimates of gross value added (GVA), which suggest a recovery from 6.2 per cent to 6.7 per cent in the last two quarters. Sharper recovery in the construction sector from 2.8 per cent to 6.8 per cent only indicates that the Indian economy has recovered strongly from the two large shocks that it has faced in the last one year. Similar robust growth is also seen in the manufacturing sector, which has increased from 6.9 per cent to 8.1 per cent between Q2 and Q3.

In addition, the revival in the construction activity also indicates an overall revival in demand in the economy and should have a positive impact on other construction-related sectors as well as on the employment creation.

On the demand side, there seems to be a recovery in all the indicators including exports. However, increase in the import demand (which is growing at 8.7 per cent), higher than exports, could put pressure on the external account as well as the exchange rate.

A look at the fine print also suggests revival in the overall domestic demand. Leading indicators such as net tonnage in the railways as well as the sale of commercial vehicles showed a buoyant growth of 8.6 per cent and 33.9 per cent, respectively. Overall these trends in both GDP as well as GVA suggest that the Indian economy is on a recovery path even after netting out the low base impact, as some analysts have suggested.

There are some downside risks for such robust recovery in the coming quarters. As the Reserve Bank of India (RBI) has already indicated, both inflation as well as its expectations for the next two quarters seem to suggest that CPI (consumer price index) inflation could increase to about 5.5 per cent. Such inflationary pressure could have an adverse impact on demand as the monetary policy committee could hike the policy interest rates in the next round.

In addition to this, the recent Union budget and its proposals, which suggest a significant shift from public capital to consumption expenditures, might pose a serious challenge to further recovery in the private investments. While the government has taken many measures to improve the overall investment climate in the country, recent incidents could pose challenges to the economy.

The crisis in the Indian banking industry following the PNB case, which is still unclear and evolving, is going to dampen down the overall expansionary plans of the private sector.

However, there are some positive signs as well. The recent agricultural output estimates, which suggest a record 277.5 million tonnes for 2018 despite many crises that the sector has faced, indicate an increase in the future demand in the rural segment. This could be further augmented by a number of proposals in the Union budget, which is expected to increase the fund flow to the rural segment.

In addition to this, most of the estimates suggest a robust recovery in the world as well as advance country GDP growth in 2018. Such positive expectations on rural as well as external demand on the back of overall improvement in the ‘ease of doing business’ should ensure no further slippage in the growth prospects in the coming quarters.

(Authors are with National Institute of Public Finance and Policy, New Delhi. Views are personal).