Brief: A larger WPI deflator responsible for lower than expected Q4 growth.

Impact: Neutral

India’s Q4, FY17 has posted a four year low growth of 6.1% which SMERA believes is owing to a higher deflator, which in turn resulted from an unfavorable base effect. When considering the difference between the nominal and constant growth rates of the economy, the role of the deflator become more apparent. While the gross value added by the economy at constant price has expanded by just 5.57%, at 11.3%, nominally the economy recorded a healthier growth rate in Q4 FY17, faster than both Q4 FY16 and Q3 FY17.

Similarly, the agriculture sector recorded a healthy growth of 5.2% in Q4 FY17 as compared to its five year average growth of 2.4%. The sector shares 11.3% in overall GVA, but contributed 14.6% in GVA growth of Q4. With the healthy monsoon food grain production has expanded by 8.6% and horticulture sector (fruits & vegetables) has expanded by 3.3%. The resultant massive food production has had a downward effect on food inflation, which dropped to a five years low of 1.5%. Lower price level have however lowered returns to farmers at a time when the government is envisaging doubling farmers’ income in next five years. Bumper production has anyway caused difficulties in procurement processes.

The industrial sector, on the other hand, has recorded a mild growth rate of 3.1%, which is still a three year low. The poor performance of this sector is attributed to the demonetization exercise in November, 2016, as a significant portion of the sector is unorganized. The construction sector, which accounts for 8% in the GVA has witnessed a negative growth of (-) 3.7% in Q4 and remains the most vulnerable sectors at this time.

Service sector on its part (a major component of GDP with 53%) has recorded 7.2%. As a comparison, average growth of services in the H1 of FY17 was above 8%. Post-demonetization, growth has contracted to nearly 2.7%. Primarily, slowdown is driven by lower than expected growth in financial, real estate, and business services; the sub sector as a result recorded 2.2% expansion in Q4.