The GDP growth figure for Q1 was eagerly awaited for several reasons. First, in light of the tariff trauma inflicted by the US on India, this number was going to be important even though the decision has been implemented only in late August. Second, it will be a major lever for the Reserve Bank of India (RBI) when it takes a decision on the repo rate. The direction of policy has changed from inflation to growth in the past few policies and the 7.8% number definitely does not indicate any weakness. Third, given the final growth projection of around 6.5% for the year, it will provide a cushion to any downside in the coming quarters.
The performance has been more than satisfying as growth is broad-based in all the services segments, and two in the secondary sector grew at impressive rates. Agriculture has provided the expected support while mining and electricity have been the low performers, which was expected as the growth numbers mirror what was already known in the index of industrial production (IIP) numbers for this quarter. Hopes are high of a recovery in urban demand this festival season with the government also likely to take some affirmative steps.
One of the major contributors to manufacturing growth has been a steady increase in profits, notwithstanding a lower IIP growth. In fact, the highlight of corporate performance was lower growth in turnover mainly due to the urban consumption challenge, but smart rise in profits which is a major part of the concept of value added. If one were to look ahead, the scenario is one which can be “stable to better”. The reason is that the element that can drive manufacturing is expected to be consumption, where the government has already given a boost through income tax relief. The goods and services tax (GST) cuts should come into effect next month, which will also help boost consumption. Nominal consumption grew by 9.1% this quarter, and it should get better to support growth at a time when inflation is rather low. The monsoon has been good and augurs well for rural consumption too. The investment rate has also been stable this quarter at 30.4%, which can improve gradually as consumption picks up.
Construction has been another star performer with a growth of 7.6%. The contribution has come from both the government focus on infrastructure as well as the housing sector. The latter has witnessed signs of revival, which can be expected to sustain, if it is not bettered, during the festival season when individuals normally buy homes.
The services sector has once again been the engine for growth. Given that ours’ is a services-driven economy, a lot of support comes from this segment. In fact, it has to counter the repercussions of tariffs, which is likely on manufacturing. Trade, transport, etc. clocked growth of 8.6% as consumer spending continued to be brisk with “experience” still being a driving factor. The boom in e-commerce and retailing has also contributed to the growth. And a greater use of phones and internet has increased output from the communications segment.
The financial sector continued to register swift growth of 9.5% in line with that in deposits and credit. This may remain stable for the next couple of quarters as growth in credit is expected to pick up in the busy season. Similarly for public administration and defence services, 9.8% growth over 9% last year is impressive as the government has been on target with spending both at the central and state levels.
A point of curiosity that will be nagging the reader is that while the direction all these segments took was on expected lines, the numbers have been high. This can be explained by the way in which GDP numbers are reckoned. All numbers are generally calculated in current prices that are available. These numbers are then scaled down based on price deflators. These deflators tend to be the wholesale price index (WPI) in most cases. This has to be done to convert nominal numbers to real. This year, the WPI has tended to be either very low or negative. This comes out from the growth in nominal GDP which was 8.8% this quarter—just 1% higher than the real GDP growth. Normally these two numbers have a difference of 3-4%. Given that inflation is expected to be benign and low for at least Q2 and Q3, there would be a tendency for an upward bias in the real GDP growth numbers.
All this also means that achieving the 6.5% growth number, which the RBI has projected for the year (at the time of forecast it did not take into account the additional 25% tariff imposed by the US), is possible. Tax benefits have been granted to individuals on income and a similar benefit is expected from GST. Both will aid domestic demand, which is now crucial for steadying the boat assuming that exports to the US will take a hit due to the tariffs (likely to materialise after three-four months). With expectations of a normal monsoon, kharif production—which is a good proxy for potential rural spending—seems to be on course. Therefore, this is a good augury.
The next question is, how will the Monetary Policy Committee look at this number? If there will be an upward bias due to the deflators in the coming quarters too, then the overall GDP growth will definitely be one which may not cause concern. Besides, the transmission of past actions is still on with the cash reserve ratio cut to be invoked from September onwards. It may be tricky to support a rate cut at this time based on growth numbers—either of Q1 or the full year. Yet the tariff impact on the micro, small, and medium enterprise sector in particular will always be on the radar. It would be an interesting call nonetheless.
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