India: Economy picks up in July–September quarter on strong domestic demand
November 30, 2015
India’s economy picked up pace in the second quarter of fiscal year 2015, as the country continues to withstand the headwinds plaguing other economies in the East and South Asia (ESA) region. GDP growth accelerated from 7.0% in the first quarter of FY 2015 to 7.4%, which matched FocusEconomics panelists’ projections. While most emerging market economies have struggled this year and lost steam, India has been able to buck this trend thanks largely to the country’s resilient domestic demand and limited reliance on the external sector for growth.
Q2’s acceleration was driven by a robust performance in domestic demand on the back of strong fixed investment growth and government spending. Fixed investment recorded the largest expansion in over one year, rising 6.8% in Q2 (Q1 FY 2015: +6.8%). The result was underpinned by greater public investment spending that was allocated in the budget for FY 2015 and the government’s efforts to create a more-business friendly environment and ease foreign-investment regulations. Similarly, government consumption picked up pace in the second quarter, rising 6.8%, which was above the previous quarter’s 1.2% expansion. However, the government front-loaded expenditure and consumption is likely to wane in the coming quarters due to fiscal constraints. In contrast, private consumption lost steam slowing from 7.4% growth to a 6.8% increase in Q2. Despite tailwinds from slowing inflation, a below-average monsoon season likely dragged on rural consumption.
On the external side, weak global demand outpaced falling imports causing the external sector’s drag on growth to increase. Exports fell 4.7% in the second quarter which was a less pronounced decline than the 6.5% tallied in the previous period. Sluggish global demand has depressed export revenues and prompted the government to extend an interest subsidy scheme for exporters in November. Imports fell 2.8% in Q2 (Q1 FY 2015: -5.4% year-on-year), largely on the back of the low commodity price environment which has caused the value of oil imports to plummet. As a result, the external sector’s contribution to growth deteriorated from minus 0.3 percentage points in Q1 to minus 0.6 percentage points in Q2.