Sept. 2018 Quarter: Performance Analysis


Ashish Agrawal
Founder, India Business Analysis | IIT Roorkee, IIM-C alumnus

After hitting a high of 8.2% in the June’18 quarter (Q1 of FY’19), the GDP growth of India has slowed to 7.1% in the Sept.’18 quarter (Q2 of FY’19) as per data released by MOSPI recently. GVA growth rate is also along the same lines: at 6.9%, as against 8.0% in Q1.

Even though the rate has moderated over the previous quarter, it is the fourth quarter of 7%+ growth, providing a sense of stability to the economy that went through adjustments due to demonetization and GST. However, issues like sharp rise in crude price or disturbance in the financial market may keep the growth rate under check in the current quarter. In terms of absolute value, GDP at constant price is INR 34 lakh crore and INR 45.5 lakh crore at current prices. GDP estimation (it may not be correct to call it ‘calculation’) is a complex exercise, which begins with calculation of the GVA. GVA is separately reported for eight sub-segments, namely, agriculture (etc.), mining, manufacturing, electricity & other utilities, construction, trade (and other services, such as, hotel, transport, communication), financial (and real estate & professional services) and finally, public administration, defence & other services.

The financial services group has nearly 23% weightage, whereas trade and manufacturing have 17% each. Agriculture and public services account for 10–12% each; and the rest have less than 10% weight.

The GVA calculation is based on data inputs, such as agricultural production, financial results of listed companies, central & state government expenditure, performance of key sectors (like railways, road, air & water, communication, banking and insurance). GDP is, then, calculated by adding indirect tax revenue (minus subsidy) to GVA. Tax revenue used for GDP compilation includes non-GST revenue and GST revenue based on GSTR filings. The figures are, then, deflated by appropriate price indices (which is different for each group) to remove the impact of inflation, and arrive at GDP/GVA at constant prices.

The current series takes year 2011–12 as the base year.

For the current quarter, the public administration segment has recorded the maximum growth (10.9%). The segment is largely driven by government expenditure; and provides a cushion in cases when other segments are not doing well. It has recorded an average growth of 11.1% over the past eight quarters since demonetization, as against just 7.9% in the earlier period; providing some support to the economy. Growth of the manufacturing sector has come down sharply (from 13.5% in Q1 to 7.4% now). The slowdown is, probably, due to sharp rise in crude prices. Yet, the rate is reasonable for the sector, which is trying to stabilize itself.

Another way to calculate GDP is expenditure-side analysis. GDP is classified into three groups: Private Final Consumption Expenditure (PFCE, share 54.5%), Government Final Consumption Expenditure (GFCE, 12.4%) and Gross Fixed Capital Formation (GFCF, 32.3%). The last refers to the money spent on investment.

While PFCE has increased by 7%, the other two have risen by over 12%. As India has been largely witnessing “consumption” driven growth, lower PFCE is actually good for a country like ours. It will help channelize resources into building physical and social productive capacity of the economy, through higher GFCF and GFCE.

The share of GFCF in total GDP has risen to 32.3% for the quarter after hitting a low of 30.3% in FY’16, which is good but not yet sufficient (the share had reached about 37% during 2006–08). It may be noted that the secret of growth of the Chinese economy is GFCF, which has been almost 50% for several years.

A word on agriculture and mining, the two primary sectors. The share of agriculture has been declining steadily, reaching a level of 10.2% in Q2 (from 17.2% in FY’12). Even though the average growth rate has moved up to 4.6% over the last eight quarters (from 1.2% in the previous year), it is still not sufficient.

The condition of core farming is even worse, as most of this growth has come from livestock, forestry & fisheries, which account for over half of the segment’s contribution. The farming sector needs a breakthrough, may be through massive investment in irrigation, mechanization, etc., which will bring about a quantum leap in productivity, like in the earlier ‘Green Revolution’.

The mining sector also offers some insights, although its share is very low (just 3%). It has recorded growth of as high as 20.7%, in terms of current prices, whereas it shows a decline (-2.4%) after using price deflator. The reason being sharp rise in crude prices, which artificially inflates the value produced by the segment. This is reversed, when the production is compared on constant price basis.