GDP Growth – FY19 Performance Analysis

GDP growth declined for fourth successive quarter, reaching a level of 5.8% for quarter ended March’19, as per the data released by MOSPI recently. This is also the lowest quarterly growth rate in the five years of NDA-1 government. (How the government still came back to power is another story). Growth rate for the full year at 6.8% still looks more respectable. In absolute terms, GDP for the full year stands at Rs 140 lakh crore (constant price) and Rs 190 lakh crore at current price. Here is a look at the details.

GDP is calculated after estimating the GVA (Gross Value Added) for eight segments namely, Agriculture (forestry & fishing), Mining, Manufacturing, Electricity (and Other Utilities), Construction, Trade (and other services such as Hotel, Transport, Communication), Financial (and Real Estate & Professional Services) and last, Public Administration (Defense & Other Services). Of these, financial services accounts for highest share at over 20% whereas mining and electricity have the lowest share at less than 3% each. Total GVA plus total taxes received by the government minus the subsidy paid gives the estimate of GDP. The result of fourth quarter carries greater importance as it also provides information for the full year.

In terms of quarterly numbers, only financial services and public administration reasonable growth rate at 9.5% and 10% respectively. Excluding these two, growth rate comes down to just 4.2% for the rest. However, performance of financial services is quite surprising as the segment has been hit by NBFC crisis which surfaced around September last year. The surprise becomes even bigger when growth is compared with earlier period, as the segment had managed growth of barely 6% on an average in the previous nine quarters since demonetization.

Public administration, largely government expenditure, has grown at an average rate of 10% during FY17-19, almost 3% higher than its growth during FY14-16. This has played a key role in maintain growth momentum. Government expenditure is a popular method prescribed to stimulate the economy, called ‘Keynesian economics’. While this comes with higher government borrowings reflected in higher fiscal deficit, it hasn’t happened so far this time. This is a sign of government’s prudent and tight fiscal and expenditure management.

Agriculture sector rate came down sharply to less than 3% after growing at over 5% for two consecutive years. For the fourth quarter, it has actually witnessed a decline, although marginal at 0.1%. For mining sector also, the decline is sharp, from average of over 8.5% during FY15-18 to just 1.3%. This is largely due to declining crude oil and natural gas production. Contrary to perception, construction sector has grown at 8.7% against average growth of close to 6% in the earlier period. However, for the fourth quarter, growth was lower at 7.1% against average of 9% in the first nine months.

Performance of manufacturing sector, source of highest blue-collared jobs, remains subdued. Its growth rate for the quarter stands at barely 3.1%, sharp decline from over 12% in Q1’19. While the annual growth rate at 6.9% is higher than 5.9% in FY18, the quarterly trend would continue to drive the short term performance. Performance of the segment is critical to the task of creating employment and would require out of the box thinking to spur it. Some of the measures could be interest rate subvention for investment in efficiency improvement and environmental equipment (as initiated for textile industry almost two decades ago), investment in agro-processing industry, mining industry etc.

GDP is also calculated from the expenditure side and is classified as Private final consumption expenditure (PFCE), Government final consumption expenditure (GFCE) and Gross fixed capital formation (GFCF). The three segments have recorded growth of 8.1%, 9.2% and 10% respectively. Figures shows that the much talked consumption slowdown may be faced by some of the segments and at an aggregate level, there is no such trend. Investment growth reflected in GFCF has revived with average growth of 9.2% during FY17-19 against just 3% during FY13-15. Share of GFCF in total GDP has risen to 32.3% for the year after hitting a low of 30.7% in FY16. It may be noted that this share had reached about 37% during 2006-08, the period of investment boom. However, unequal distribution across different segments of the economy and large number of shady deals caused many of these projects becoming unviable ultimately leading to huge increase in NPAs for banking sector.