Key Takeaways from Third Quarter GDP Estimates

On the 28th of February, the Ministry of Statistics and Program Implementation (MOSPI) released the GDP estimates for the 3rd quarter ended December 2017. Of course, these estimates are subject to revision at a later date. As per the second advance estimates for the third quarter, the GDP growth stood at 7.2%, which is higher than the revised estimates for the 2nd quarter by nearly 70 basis points. However, the full year GDP growth for FY-18 will be down to 6.6% as compared to 7.1% in the fiscal year 2017.

The good news appears to be that the trend seems to have turned decisively up and the Q3 GDP growth has moved up to 7.2% from a low of 5.7% in the first quarter. The fourth quarter will at least have to maintain growth at these levels to ensure that the full year GDP growth at over 6.5% is maintained. It may be recollected that in the revised methodology, GDP is calculated with reference to the base year 2011-12.

Is India still stuck at the $2 trillion GVA level?

According to the advanced estimates, the GVA (Gross Value Added) for the full year 2017-18 is likely to be Rs.130 trillion. At the current exchange rate of 65/$, this works out to an annual GVA of $2 trillion. India appears to have stagnated around the $2 trillion level as a weaker rupee is largely negating the growth effect in dollar terms. The reason is that there is still too much dependence on government initiative and government spending. To understand this look at the difference between the GDP and the GVA! The GVA measures the GDP without the impact of taxes and subsidies. When these two are removed the full year growth estimate falls from 6.6% GDP to 6.4% GVA.

GDP for the full year 2017-18 is likely to be around Rs.167.52 crore (after adding the impact of taxes). That translates into a full year GDP at $2.58 trillion. Obviously, India will have to consistently grow at a much higher rate to actually narrow its gap with larger economies. In macroeconomic parlance a GDP level of $3 trillion is considered to be the tipping point for transporting the economy into a higher plane.

How are the specific sectors driving GDP growth in 2017-18?

To understand the drivers of GDP let us look at the detailed break up of key sectors and how they are likely to perform in 2017-18 vis-à-Vis last year…

• The agriculture, forestry and fishing sector is likely to grow at 3% in 2017-18 less than half the rate of 6.3% reported last year. This is largely because the production of food grains did not grow as it was on a much larger base. Also 2016 was a year of normal monsoons while year 2017 saw sub-par monsoons in most regions.
• Mining and quarrying was a disappointment with growth at just 3% compared to 13% in the previous year. While there was some improvement in the area of coal, crude oil and natural gas, the core mining activity of minerals is likely to be much slower this year.
• Manufacturing at 5.1% for the whole year is likely to be lower than 7.9% in the previous year. Apart from the base effect, there was a slowdown in the value of output due to lower WPI inflation. While the private sector has managed a growth of above 8%, the SME and the unorganized sector has struggled in the aftermath of GST and demonetization and are yet to come out of the mess. The unorganized and SME segment is likely to register a growth of just around 3% for the full year.
• While electricity production is also likely to be marginally better, the big booster could come from the construction space. The construction sector is likely to grow at 4.3% in the current year as compared to 1.3% last year. While the residential construction is still coming to terms with RERA, the commercial space has seen tremendous activity and that is likely to keep this space buoyant. Remember, construction has strong externalities and that will have strong downstream effects.
• Among the services, growth in trade, hotels, transport and financial services saw a 100 basis points improvement over last year. This could also be due to the inflationary effect of GST which has inflated the value of services due to the higher impact of GST.
• As stated earlier, the big thrust to growth in this year will again come from public spending by the government. Public administration, defence and other services continued to grow at over 10% in the current year, almost similar to the previous year.

The GDP estimates for the third quarter is surely showing some green-shoots of recovery but we will have to wait for the final data and the full year data to get a clearer picture. On a full year basis, GDP for 2017-18 is likely to be at least 50 basis points lower than the previous year.