Charts: Q1 GDP growth slows to 7%; call for RBI rate cuts gets shriller

By Rajesh Pandathil and Kishor Kadam

India’s economy grew 7 percent during the first quarter of the current financial year, slower than 7.5 percent in the previous quarter but faster than 6.7 percent in the year-ago quarter.

The growth is lower than expected as most polls had expected the growth to be around 7.5 percent.

The new figures have come at a time when a slowing China is dragging down the global economy and there are doubts about India meeting its growth target.

The government has set a target of 8.1-8.5 percent GDP growth for the current fiscal year, while the RBI estimates it at 7.6 percent.

Despite global turmoil, the government has maintained that the country will meet the target.

However, experts have voiced concerns about the growth trend.

Here are are five graphics that explain the trend:

As is evident from the graphic above, the country’s GDP growth is struggling in a tight range, as opposed to the expectations of the government. Debopam Chaudhuri, chief economist & Vice President of Research at ZyFin Research, said, “We don’t see any significant recovery over the next two quarters with economic activity slumping further."

A look at the table below will give a clear idea as to which are the industrial segments that have played sport.

Out of eight industries, six have witnessed a fall in gross value added (GVA) growth at basic prices. Of them, the worst performer is electricity which witnessed a 3.2 percent growth as against 10.1 percent a year ago. The decline in the power sector growth is a key indicator of the slowing industrial activity. It is this sector that has pulled down the overall growth. The only segments that have seen a rise in growth are trade, hotels, transport, communication and broadcasting and also construction. However, the improvement witnessed is just marginal.

According to A Prasanna, economist with ICICI Securities primary dealership, the overall GVA growth of 7.1 percent is misleading.

“The main reason for GVA to be higher than expected is due to the surprise agriculture growth. Going ahead we expect agriculture growth to weaken due to the uneven monsoon, which will pull down the growth number,” he told Reuters.

Anis Chakravarty, senior director, Deloitte in India, meanwhile, noted that the GDP growth for the last quarter at 7.5 percent was accompanied by a GVA growth of 6.1 percent while in the latest print the GDP growth at 7 percent has come with a GVA growth of 7.1 percent. According to him, the pick-up in growth in construction bodes well for the coming quarters. “The latest numbers depict an economy that is in the early stages of recovery and is showing modest improvements,” Chakravarty said.

The next factor to look at is gross fixed capital formation or capital expenditure. At 27.8 percent, this figure is at the lowest in the new series - at a nine-quarter low. Clearly, corporates are in no mood to invest yet.

To find out the reason why companies are still holding back their investment one just need to look at the consumption figures.

The table above shows that private consumption expenditure (or household demand) and the government’s corresponding number are 61.3 percent and 11.9 percent. Experts say these denote low aggregate demand conditions in the economy.

According to Devendra Kumar Pant, chief economist, India Ratings & Research, “GDP growth this year will be led by consumption growth (backed by falling inflation and monetary easing), investment growth revival will take place once capacity utilisation starts increasing.”

In an indication that matters are likely to get worse going ahead, core sector growth for July slipped to 1.1 percent from 3 percent in June and 4.1 percent in the year-ago period.

The eight core sector industries are coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity. It is the decline in output of crude oil, natural gas and steel that contributed to the sharp contraction.

Overall, the growth scenario indicates the Reserve Bank of India will have to cut interest rates further without much delay.

“From the looks of it, it seems to be suggesting a further deceleration from last quarter, which in our view clearly paves the way for two more repo rate cuts before the close of the financial year,” Jyotinder Kaur, principal economist, HDFC Bank, told Reuters.