Q1 GDP GROWTH

FINAL PROJECTION OF AROUND 6.5% FOR THE YEAR WILL CUSHION ANY DOWNSIDE IN THE COMING QUARTERS

More than satisfying

HE GDP GROWTH figure

for Q1 was eagerly

awaited for several rea-

sons. First, in light of the

tariff trauma inflicted by

the US on India, this number was going

to be important even though the deci-

sion has been implemented only in late

August. Second, it will be a major lever

for the Reserve Bank of India (RBI)

when it takes a decision on the repo

rate. The direction of policy has

changed from inflation to growth in

the past few policies and the 7.8%

number definitely does not indicate

any weakness. Third, given the final

growth projection of around 6.5% for

the year, it will provide a cushion to any

downside in the coming quarters.

The performance has been more

than satisfying as growth is broad-

based in all the services segments, and

two in the secondary sector grew at

impressive rates. Agriculture has pro-

vided the expected support while min-

ing and electricity have been the low

performers, which was expected as the

growth numbers mirror what was

already known in the index of indus-

trial production (IIP) numbers for this

quarter. Hopes are high of a recovery in

urban demand this festival season

with the government also likely to take

some affirmative steps.

One of the major contributors to

manufacturing growth has been a

steady increase in profits, notwith-

standing a lower IIP growth. In fact, the

highlight of corporate performance

was lower growth in turnover mainly

due to the urban consumption chal-

lenge, but smart rise in profits which is

a major part of the concept of value

added. If one were to look ahead, the

scenario is one which can be "stable to

better". The reason is that the element

that can drive manufacturing is

expected to be consumption, where

MADAN SABNAVIS

Chief economist, Bank of Baroda

the government has already given a

boost through income tax relief. The

goods and services tax (GST) cuts

should come into effect next month,

which will also help boost consump-

tion. Nominal consumption grew by

9.1% this quarter, and it should get

better to support growth at a time

when inflation is rather low. The mon-

soon has been good and augurs well for

rural consumption too. The invest-

ment rate has also been

stable this quarter at

30.4%, which can

improve gradually as con-

sumption picks up.

Construction has been

another star performer

with a growth of 7.6%.

The contribution has

come from both the gov-

ernment focus on infra-

structure as well as the

housing sector. The latter

has witnessed signs of

revival, which can be

expected to sustain, if it is

not bettered, during the festival season

when individuals normally buy homes.

The services sector has once again

been the engine for growth. Given that

ours' is a services-driven economy, a

lot of support comes from this seg-

ment. In fact, it has to counter the

repercussions of tariffs, which is likely

on manufacturing. Trade, transport,

etc. clocked growth of 8.6% as con-

sumer spending continued to be brisk

with "experience" still being a driving

factor. The boom in e-commerce and

retailing has also contributed to the

growth. And a greater use of phones

and internet has increased output

from the communications segment.

The financial sector continued to

register swift growth of 9.5% in line

with that in deposits and credit. This

may remain stable for the next couple

of quarters as growth in credit is

expected to pick up in the

busy season. Similarly for

public administration

and defence services,

9.8% growth over 9%

last year is impressive as

the government has been

on target with spending

both at the central and

state levels.

Given that inflation

is expected to be

benign and low for

at least Q2 and Q3,

there would be a

tendency for an

upward bias in the

real GDP growth

numbers

A point of curiosity

that will be nagging the

reader is that while the

direction all these seg-

ments took was on

expected lines, the num-

bers have been high. This can be

explained by the way in which GDP

numbers are reckoned. All numbers are

generally calculated in current prices

that are available. These numbers are

then scaled down based on price defla-

tors. These deflators tend to be the

wholesale price index (WPI) in most

cases. This has to be done to convert

nominal numbers to real. This year, the

WPI has tended to be either very low or

negative. This comes out from the

growth in nominal GDP which was

8.8% this quarter-just 1% higher

than the real GDP growth. Normally

these two numbers have a difference

of 3-4%. Given that inflation is

expected to be benign and low for at

least Q2 and Q3, there would be a ten-

dency for an upward bias in the real

GDP growth numbers.

All this also means that achieving

the 6.5% growth number, which the

RBI has projected for the year (at the

time of forecast it did not take into

account the additional 25% tariff

imposed by the US), is possible. Tax

benefits have been granted to individ-

uals on income and a similar benefit is

expected from GST. Both will aid

domestic demand, which is now cru-

cial for steadying the boat assuming

that exports to the US will take a hit

due to the tariffs (likely to materialise

after three-four months). With expec-

tations of a normal monsoon, kharif

production-which is a good proxy

for potential rural spending-seems

to be on course. Therefore, this is a

good augury.

The next question is, how will the

Monetary Policy Committee look at

this number? If there will be an upward

bias due to the deflators in the coming

quarters too, then the overall GDP

growth will definitely be one which

may not cause concern. Besides, the

transmission of past actions is still on

with the cash reserve ratio cut to be

invoked from September onwards. It

may be tricky to support a rate cut at

this time based on growth numbers-

either of Q1 or the full year. Yet the tar-

iff impact on the micro, small, and

medium enterprise sector in particu-

lar will always be on the radar. It would

be an interesting call nonetheless.

Views are personal