Brief: India’s GDP growth rate has remained mute at 5.6% in Q1, FY18; we attribute the slower expansion to inventory clearance pre GST implementation; with the implementation of pay commission and healthy monsoon, farm loan waivers - the consumer demand is expected to be robust; Government’s revenue is expected to get a boost through an expansion in tax base; which in turn comes from formalization of the economy; External sector, on the other hand, is expected to neutralize the performance.

Impact: Negative

India’s GDP growth rate has remained mute at 5.6% in Q1, FY18. SMERA’s expectation for the quarter was 6.8% and we attribute the even slower expansion to inventory clearance pre GST implementation. On a sector wise performance, agriculture sector has expanded by 2.3%, industry (mining, manufacturing & electricity) by 1.4% and service (trade, finance, and public administration) by 7.8%. Among these segments the industrial sector, which accounts for 23%, has expanded by just 1.4% - nearly nine percentage points less than that of the previous year. The private corporate sector that contributes 75% in manufacturing output has contracted by (-) 0.9% in Q1, FY18 as against 10.2% during the said period FY17. The quarter shows that the value added by the segment, which is now in line with the growth in units produced (IIP) is also contracting. The insecurity due to the GST implementation could be a reason but more of that later. Private investment is still at an all-time low and GFCF remains below 30% of GDP. In contrast to the industrial output, the trade and transport activities have recorded solid growth of 11.1% during the reference period. Logistic transport by railways and civil aviation has recorded 3.3% and 19.2% growth respectively. Similarly, cargo handle at major ports has recorded 5% growth.

The situation indicates that producers had focused on clearing inventory from the system in order to align with the new tax structure and we were expecting this. However, we believe that with a smooth implementation of GST, the industrial production growth is expected to pick up pace, August onwards.

Future outlook:

The GST revenue has stood at Rs. 923 billion in July, 2017, the first month of implementation. This indicates that tax revenue is likely to increase in the coming quarters and positively contribute to the GDP growth. Similarly, with the implementation of pay commission and healthy monsoon, farm loan waivers - the consumer demand is expected to be robust. Government’s revenue is expected to get a boost through an expansion in tax base, which in turn comes from formalization of the economy; Government Final Consumption Expenditure (GFCE) is now over 12.5% of GDP as compared to previous year’s 11.3%. This signifies the continuation of the public expenditure to revive the economy.

External sector, on the other hand, is expected to neutralize the performance of the above indicators. In recent months, growth in imports (28.3% growth during Apr-July) has outpaced the growth in export (8.9%) and wider the trade deficit.

Sector-wise GDP growth rate (% age YoY):

                      Source: MOSPI, SMERA Knowledge Centre