Mixed growth signals

Official data showing the GDP expanding at the fastest pace in seven quarters in the three months ended March 31, a brisk 7.7% at that, is reason for cheer. Given that this has been propelled largely by increases in manufacturing and construction activity is a basis for optimism given that the former contributes almost a fifth of quarterly gross value added (GVA) and the latter about 8%. The rebound in construction is all the more heartening since it is both a creator of direct and indirect jobs and a multiplier of overall output. In the fourth quarter, construction is estimated to have posted a robust 11.5% growth, almost a doubling in pace from the 6.6% in the third quarter, and compares favourably with the contraction of 3.9% seen in the demonetisation-hit year-earlier period. Two key groupings of services that together contributed more than 38% of fourth-quarter GVA — the first comprising trade, hotels, transport, communication and broadcasting; and the second, financial, real estate and professional services — accelerated year-on-year, helping lift full-year sectoral GVA growth. Agriculture, forestry and fishing continued an accelerating trend over the four quarters of the last fiscal, with growth of 4.5% boosting the annual expansion to 3.4%. While the fiscal year’s pace for this vital sector is still appreciably lower than the 6.3% in 2016-17, if the quarterly momentum is sustained and the monsoon pans out as forecast, we could see a more broad-based revival in rural demand.

There are, however, pressure points in the estimates of national expenditure. Private final consumption expenditure continues to languish, with the share of its contribution to GDP sliding to 54.6% in the January-March period, from 59.3% in the preceding quarter and 55.2% a year earlier. Government spending too eased in the fourth quarter, as a proportion, to the lowest quarterly level of the last fiscal at 9.5%. Only gross fixed capital formation, which reflects investment demand, provided cause for some comfort as it contributed 32.2%, which was the most in percentage terms since the 32.5% posted in April-June 2016. A sobering thought here is that the very same growth momentum is likely to spur price pressures across the economy that, combined with the bullish trend in global oil, could fan faster inflation. This may leave the RBI with little option but to raise interest rates, possibly as early as next week. Separately, the latest survey-based Nikkei India Manufacturing Purchasing Manager’s Index shows manufacturing activity expanded at a weaker pace in May from the previous month amid tepid domestic demand. With borrowing costs set to rise and global trade tensions adding to uncertainties for India’s exporters who are yet to capitalise on the rupee weakness, policymakers will need to eschew populism and stick to policy prudence if the tenuous momentum is to be sustained.