Growth comes roaring back to the Indian economy

The overhang of demonetisation and implementation of goods and services tax (GST) on the Indian economy appears to be well and truly over as gross domestic product, or GDP, clocked a growth of 8.2% in the first quarter of FY19, according to estimates of the Central Statistics Office released on Friday.

Though the rate in the year-ago period was just 5.6%, economists say that the low-base effect is only to the tune of 50 basis points, suggesting that growth trends in India are back to what they had been before demonetisation was announced in November 2016.

“India’s GDP for the first quarter this year growing at 8.2% in otherwise an environment of global turmoil represents the potential of New India,” said finance minister Arun Jaitley. “Reforms and fiscal prudence are serving us well.”

The headline number has spread cheer across India Inc, economists and political circles. “With the Asian Games on, this [GDP growth numbers] is like receiving news of a medal… We’ve been sensing a strong recovery of the economy across our various businesses. This [GDP data] supports that hypothesis. Now, to sustain momentum we need more reforms & swift decision making by policymakers,” said Anand Mahindra, executive chairman of Mahindra and Mahindra on Twitter.

“India’s Q1 GDP for 2018-19 grows at a phenomenal rate of 8.2%. This is reflective of the Government's initiative to spur the Indian economy and is a result of the bold reforms undertaken by Prime Minister Shri @NarendraModi," said Piyush Goyal, minister for railways & coal, on Twitter.

Rajiv Kumar, vice chairman of NITI Aayog, said on Twitter, “Excellent news of GDP hitting a 9-quarter high at 8.2%. This is slightly higher than my own estimate of 7.8%… The growth rate will surely be higher in the coming quarters.”

Even former finance minister and senior Congress leader, P. Chidambaram, who has been one of the harshest critics of the current government’s economic policies, had little to pick apart in the immediate aftermath of the news. “Happy that the rate of growth has quickened, but look at the table once again. Q1 growth rate is based on the lowest base (5.6%) in the last 8 quarters. Going forward, the base effect will not be so favourable. And when we reach Q3 and Q4, the rate of growth may decline and the annual growth rate may be more or less like last years,” he said on Twitter.

A close look at the numbers reveals several positive takeaways. Quarterly gross value added or GVA grew at 8% at basic prices. Significantly, manufacturing was a major contributor to the increase in GVA by growing at 13.5% at basic prices. The employment generating sector of construction also clocked a growth of 8.7% at basic prices during the quarter. Also of importance is the declining dependence on public administration, defence and other services, where growth slowed to 9.9% as compared to 13.5% a year ago. Even agricultural growth came in at 5.3% despite talks of agrarian distress in rural areas.

“The GDP growth rate of 8.2% for the Q1 (April-June) of fiscal year 2018-19 indicates clearly that several structural reforms introduced such as GST have started giving rich dividends. The growth in manufacturing sector (13.5%) also indicates broad-based recovery of demand,” said Hasmukh Adhia, finance secretary at the Ministry of Finance on Twitter.

Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, said in a statement that continued impetus on structural reforms and effective implementation of policy initiatives led to the growth in GDP. He added that encouraging growth rates in agriculture, manufacturing and construction show that the growth momentum continues to be broad-based. Also, “one expects favourable monsoons to further boost agricultural output and rural consumption in the coming quarters”, the statement said.

There were some worrying signs, particularly in the services sector. Growth in trade, hotels, transport, communication and services related to broadcasting fell to 6.7% as compared to 8.4% a year ago. Similarly, financial, real estate and professional services clocked a 6.5% growth as compared to 8.4%.

Besides the GDP numbers released on Friday, data on the output of the eight core industrial sectors was also released. This clocked a 6.6% growth in July 2018 as compared to the same month last year. The figure was slightly lower than 7.6% in the month of June.

There was also worrying news on the currency front where the rupee hit an all time low of Rs 71 to the US dollar. It ended up closing at Rs 70.83 to the dollar.

With rising crude oil prices, there are concerns of India missing its fiscal deficit target. Data from the Ministry of Finance released earlier in the day showed that fiscal deficit has reached 86.5% of the target for 2018-19 in the April-July period. In the Union Budget 2018-19, the government had set a fiscal deficit target of 3.3% of the GDP or Rs 6.24 lakh crore.

However, Subhash Garg, secretary, department of economic affairs at the Ministry of Finance, moved to ease any such concerns. Speaking at a media briefing, Garg said that the revenues so far have been lower than expected but the shortfall will be made up in the third and fourth quarters. Garg also welcomed the GDP growth numbers and said that the V-shaped recovery is now complete. He expressed confidence that India can close the year with a GDP growth of more than 7.5% for the full financial year of 2018-19.