GDP growth moderates to 7.1% in Sept quarter

The latest GDP growth numbers underline a deepening of rural distress in the Indian economy

India’s gross domestic product (GDP) (at market prices) grew at 7.1% in the second quarter ended September 30, a decline of 1.1 percentage points compared to the first quarter ended June 30, not so much because of a slowdown in economic activity but the so-called base effect which amplified growth in the last quarter.

Gross value added (GVA) growth went down by an equal amount between the first and second quarters. The latest GDP growth numbers are 30 basis points lower than a Reuters poll forecast. One basis point is onehundredth of a percentage point. (see chart 1)

GDP growth between April and June 2017 was abnormally low at 5.6% in anticipation of the disruption from goods and services tax (GST), which was to be implemented in July 2017. This led to a spike in growth in the first quarter to 8.2%. That makes the 7.1% rate look low.

Still, the latest GDP numbers underline a deepening of rural distress in the Indian economy. Real growth in agriculture and allied activities component of GVA in the second quarter is higher than the nominal growth figures. This means that agricultural prices have actually been declining in the economy. Thousands of farmers marched in the national capital on the day these figures were released, with remunerative prices being one of the key demands of the protest. These statistics also suggest that the government’s decision to hike minimum support prices (MSP) has failed to boost farm prices, and hence incomes. (see chart 2)

Pranab Sen, an economist and India’s former chief statistician, said there is little the government can do to resolve this crisis in time for the 2019 elections. The bearish trend in farm prices is largely a reflection of a liquidity crisis in the rural economy, he explained.

MSP based procurement and MGNREGS spending, the main engines of liquidity injection by the government, have remained flat under the present government, Sen said.

He also said the rural economy has still not recovered from the liquidity shock administered by demonetization. We also need to understand that our inflation targeting framework needs to differentiate between agricultural and non-agricultural prices, otherwise the rural crisis will persist, Sen added.

What does the latest GDP data mean for annual growth? Speaking to Bloomberg Quint Soumya Kanti Ghosh, the chief economic adviser for State Bank of India expected the annual GDP growth for 2018-19 to be closer to 7%. DK Joshi, chief economist at Crisil expected the annual GDP growth be 7.4% with a downward bias. India’s GDP has had a compound annual growth rate of 7.3% under the first three years of the present government (2014-15 and 2017-18). The Economic Survey

2017-18 has estimated GDP growth in 2018-19 to be in the range of 7-7.5%.