THE Indian economy has put up an impressive show in the June quarter with the gross domestic product (GDP) growing at a remarkable 7.8 per cent year-on-year (y-o-y). Gross value added (GVA) clocked an equally strong 7.6 pc y-o-y growth. The resilience is reassuring at a time when external headwinds, especially the US tariffs, are threatening to slow the growth momentum. As experts point out, low price deflators have contributed to the high real GDP growth number with inflation being very low. Even accounting for the boost to headline numbers from low deflators, it must be said the economy is holding up quite well. Though Government expenditure – both in terms of revenue and capex – has played a big role, most sectors have indeed pulled their weight.
Both consumption and investment have done reasonably well. Belying concerns that consumption is sluggish, the private final consumption expenditure is up 7 pc, on a high base. Moreover, gross fixed capital formation has increased by 7.8 pc, largely due to the Government’s efforts.
Where estimates have not lived up to expectations is agriculture, which has grown at only 3.7 pc y-o-y growth on an extremely favourable base. However, given the good monsoon, both kharif and rabi harvests should be good. This is extremely important for the health of the farm economy, rural wages, and farm incomes, which will drive rural consumption. Manufacturing has grown at a good 7.7 pc, which is important since the sector had been languishing.
Construction, which is critical since it creates a large number of jobs, too has reported a good growth, again on an unfavourable base. This suggests a continued momentum in Government projects as also real estate ventures. With interest rates trending down, we could expect the property sector to continue to grow. Another segment comprising trade, transport, hospitality, etc., which is crucial for employment opportunities, has done well to grow at 8.6 per cent, albeit on a low base.
Banking services and real estate too have impressed. However, the deflator used for services sector, experts point out, is significantly lower than the average used over the last five-six quarters. Notably, the growth in exports at 6.3 pc was slower than anticipated; economists were expecting this to rise as a result of front-loading exports to the US but that does not seem to have happened.
With little clarity on US tariffs and highfrequency indicators for July and August not being particularly exciting, there could be some loss of momentum. The tax relief, lower interest rates, and GST cuts should boost consumption, but this could be offset by loss of livelihoods in export-oriented units and also in IT firms. Even otherwise, hiring numbers have not been particularly strong. The Government has been doing much of the heavy lifting as private capex is yet to grow meaningfully. However, direct tax collections have been somewhat subdued so far and a potential loss of revenue on account of GST cuts and concessions for exporters cannot be ruled out. Consequently, there could be some cuts in expenditure as the Government might not want to let the fiscal deficit slip too much. As such, the central bank must ensure that interest rates stay affordable as otherwise credit flows could slow.
