There is certainly disappointment on the growth front
When the GDP growth numbers for the second quarter were announced on November 30th, there was certainly a sense of disappointment. At 7.1%, the growth rate was a far cry from the 8.2% growth clocked in the first quarter. One can blame it on the base effect because the first quarter was on the back of the pre-GST slowdown in the previous year. However, if one scrubs through the fine print of the GDP numbers, there are 3 broad areas that emerge.
Weak consumption demand
One of the worrying features of the second quarter was that there was a serious pressure on consumer demand. Normally, consumption demand tends to be sticky. A temporary fall in income levels does not impact consumption in a big way. It is only when the impact on incomes sustain that consumption gets impacted. That is what we have seen in the second quarter. The impact has come due to two reasons. Firstly, the higher oil prices have been a big dampener to the India consumption story. With oil consistently high during Q2, the impact was felt on fuel demand, auto demand and a host of downstream inflation effects. Then there is the issue of rural demand. There was a huge rural thrust expected but with prices stagnant despite higher MSP, there has been little respite. That contributed to muted consumption demand during the quarter. This is one aspect that came out clearly in Q2.
Stress on farm incomes
In the second quarter, it was agriculture that proved to be the bugbear. Consider some of the numbers. The agriculture sector grew at just about 3.8% in Q2 compared to 5.1% in Q1. As a result, manufacturing also took a hit growing at just 7.4% in Q2 compared to 13.5% in Q1. One reason was weak farm prices, which is captured by the nominal GVA. The nominal GVA fell to just 2.8% showing weak price increases despite a very generous MSP policy on paper. This is likely to have larger implications for rural demand; since that is what determines rural demand. But the big giveaway is the agriculture price deflator turning negative for the first time since June 2017, showing signs of farm distress. The redeeming feature was the 12.8% growth in government expenditure which was an attempt to prop up the morale of the economy.
Services are not growing
Expectations are one thing but holding on to current advantages is another. The services sector, that drove growth, for over a decade is stagnating. Sectors like IT, telecom and banking used to be the big contributors. That is where the real pressure is coming from. With more than half the weight in the GDP, it is the services sector that needs to actually drive growth in India. Unless this sector picks up, GDP may find it hard to reach the annual target of 7.5%!
