By Mithilesh Kumar Sinha | EMN
In a significant recovery, Asia’s third largest economy, India’s Gross Domestic Product (GDP) grew at 7.2 per cent in the third quarter of financial year 2017-18 (October-December), up from 6.5 per cent and 5.7 per cent in the previous two quarters respectively as the twin impacts of demonetisation and GST implementation wane. With this, the Indian economy regained its status as the world’s fastest-growing major economy during the quarter, beating China after a one-year gap.
This recovery was sparked by a revival in investment demand, registering a growth of 12%. Consumption demand decelerates but is offset by a spurt in investment demand which strokes a rebound in growth. The double-digit growth of capital goods, the sharp rise in the government’s capital spending (it doubled to Rs 90,207 crore in Q3FY18 from a year before) and the modest pick-up in the capital spending of the state governments in Q3FY18 may have contributed to the 12% expansion in gross fixed capital formation in Q3FY18.
“All three sectors - agriculture, industry and services - have accelerated in the third quarter. Agriculture, forestry and fishing sector showed improved growth of 4.1%, while the industrial sector growth also improved to 6.8% and services sector to 7.7% in Q3 of 2017-18. Within the industrial sector, the manufacturing output surged 8.1%, utilities 6.1% and construction 6.8%, but mining sector output fell 0.1%. Among the services sector component, the output of trade, hotels, transport, communication and services related to broadcasting jumped 9.0%, financial, real estate and professional services 6.7%, and public administration, defence and other service 7.2% in Q3 of 2017-18. “Importantly GST disruption is seen waning as borne out by manufacturing sector growth at 8.1% in October-December vs 6.2% in July-September. Construction, government services and agriculture have led the growth in the December quarter. According to Economic Affairs Secretary Subhash Chandra Garg, strong fixed capital growth also indicates that investment is picking up very well and agriculture and services have performed quite well.
The current growth rate reflects that reforms by the government have started showing results The GDP data could help Prime Minister Narendra Modi, who faces criticism over mounting bad loans of state banks and a $1.77 billion fraud at state lender Punjab National Bank , the biggest in the country’s banking history.
Modi is trying to accelerate growth through higher state spending, including Rs 2.1 lakh crore ($32.36 billion) for recapitalisation of state banks, beset with mounting bad loans of nearly $148 billion. Improvement in private consumption, increase in capacity utilization and private capex cycle revival will be driving higher growth
But given that government spending has driven economic growth, the rising fiscal deficit numbers could prove to be a constraint. Growing concerns of embers over continued inflationary risks arising from high food and crude prices. High bad loans and reported fraud in the banking system have already happened. Right measures to eradicate such incidences in future and finding NPA resolution is the path ahead. There are concerns of rising fiscal deficit and possibility of interest rates rising further. While all other things seem to be in place, paucity of rainfall can be major risk in next one year.
