Manufacturing uptick accelerates GDP growth to 7.4% in Q2
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Stellar growth in the manufacturing sector pushed GDP growth for the second quarter of FY16 to 7.4 per cent providing some relief for the government after a slow first quarter, according to data release by Ministry of Statistics and Programme Implementation (MOSPI) on Monday.

Indian economy notched up 40 basis points from the first quarter with growth coming in line with VCCircle poll forecast of 7.4 per cent for Q2FY16. While growth in the second quarter was above the 7 per cent growth recorded in Q1 it came in well below the 8.4 per cent growth that the economy had seen in the corresponding period last fiscal.

While 7.4 per cent growth is good news for the economy that just stepped out of another quarter of poor performance by the corporate sector, the growth rate is far off from the government projection of 8 per cent and is in line with the forecasts from the Reserve Bank of India and international agencies which are expecting Indian economy to grow at 7.4 per cent.

The International Monetary Fund had trimmed India’s GDP growth estimate to 7.3 per cent from 7.5 per cent last month, while the Asian Development Bank had cut its prediction for 2015 to 7 per cent from 7.4 per cent.

Even RBI, in its last monetary policy statement, had trimmed its projection to 7.4 per cent from 7.6 per cent.

Manufacturing lifts GDP as agriculture holds fort

A sectoral classification showed a mixed bag for the economy as four of the eight industrial categories saw gross value added slipping below the rates seen in first quarter of the fiscal.

The biggest push to the GDP came from manufacturing front as the sector saw a growth of 9.3 per cent, the highest in 12 quarters, with the overall GVA increasing to 7.4 per cent compared with 7.1 per cent in Q1.

Construction, on the other hand, was the worst performing sector for Q2 with growth falling to 2.6 per cent from 6.9 per cent in the first quarter.

The biggest surprise came from agriculture which was able to retain a growth of over 2 per cent despite low rainfall and drought conditions across India. 

While the farm economy expanded at 2.2 per cent for the quarter ending September, the highest in five quarters, it was still lower than the over 3 per cent growth recorded  during FY14.

“While agriculture continued to surprise positively, construction activities have nearly collapsed. Continued growth momentum of the financial sector and robust manufacturing growth (highest since 2QFY13) are  encouraging,” Devendra Kumar Pant, chief economist ratings firm India Ratings & Research, said.

Consumption puzzle

Though the economy saw a better performance from the expenditure side, the numbers from private consumption expenditure were a bit puzzling. The sector recorded a growth of 55.7 per cent, down from the six-quarter high of 58.7 it had reached in Q1 despite inflation and monetary policy easing from RBI.

On the other hand, data from government consumption and gross capital formation were more reassuring.

“The pickup in growth of gross fixed capital formation to a five-quarter high 6.8 per cent, mirroring the pace of expansion of private final consumption expenditure, signals some improvement in the composition of GDP growth in Q2FY16,” said Aditi Nayar, senior economist at ICRA.

“It is possible that the transition to the new norms for sharing costs of various CSS schemes between the central and state governments from 2015-16 onwards had curtailed expenditure growth at the state level in Q1FY16. Greater spending on such schemes may have supported the pickup in growth of government’s consumption expenditure in Q2FY16,” she added.

Sunny days ahead

While the GDP forecasts were still below the government’s expectation, acceleration in growth will certainly be a boost for the government which plans to give more weight to its flagship programme ‘Make in India’ going forward.

Another relief for the government is the fiscal data for October released on Monday. Data showed government reaching just 74 per cent of the target, lower than the 89.6 per cent reached last year.

While the One Rank One Pension scheme (OROP), low divestment proceeds along with the hike announced as per seventh pay commission recommendations will have an impact on the fiscal strength, Coal India stake sale, the hike in excise duty on fuel and Swachh Bharat cess are expected to boost the government’s revenues.

“A slippage relative to the fiscal deficit target for 2015-16 appears increasingly unlikely with the government’s revenues in the remainder of FY16 to receive a boost from the recent hikes in excise duty on fuels and the Swachh Bharat cess, some of which are not sharable with the state governments,” Aditi said.

With economists predicting transmission of the rates to benefit in the second quarter and the consumption set to get a boost from the seventh pay commission, the outlook for GDP is expected to improve in the coming months. 

Another factor contributing to the growth will be the implementation of GST. With the government expanding an olive branch to the Congress, chances are that the legislation may be passed by the upper house. Earlier in April Finance Minister Arun Jaitley had said that the GST has the potential to push GDP by 1-2 per cent. 

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