India: GDP growth accelerates in Q3 FY 2017, beating expectations
In the third quarter of FY 2017—which runs from October to December 2017—the Indian economy continued to emerge from the downturn that followed the implementation of the Goods and Services Tax (GST) and demonetization. GDP grew a better-than-expected 7.2% in year-on-year terms in Q3 FY 2017, the highest figure in over a year and above the upwardly revised 6.5% increase recorded in Q2 (previously reported: +6.3% year-on-year). The figure was above the 7.0% expansion that market analysts had expected for the quarter. On the sectoral end, GVA growth rose to 6.7% in Q3 FY 2017 from 6.2% in the previous quarter.
Despite the upbeat headline figure, expenditure components were mixed in the quarter. Household spending dynamics moderated considerably as real disposable income remained subdued amid weak rural prices, low corporate wage growth and rising fuel costs. Private consumption growth eased from 6.6% year-on-year in Q2 FY 2017 to 5.6% in the October-to-December period, the weakest rise in two and a half years. Government consumption fared somewhat better, with growth accelerating from 2.9% in Q2 to 6.1% in Q3 on the back of higher public outlays.
At the other end of the spectrum, fixed investment growth leaped 12.0% in annual terms in the third quarter of FY 2017, a much better reading than the 6.9% increase in the previous three-month period and the best print in six quarters. Behind the marked improvement was higher public capital spending and more meaningful participation from central public-sector enterprises, which more than offset subdued private investment amid ongoing deleveraging processes.
The external sector, however, largely disappointed in the third quarter, with import growth outstripping that of exports despite strong global demand momentum. A sizeable commodity bill and higher capital goods imports likely fueled a strong pick-up in overall imports, which rose 8.7% from the same period of the previous year in Q3 FY 2017 (Q2 FY 2017: +5.4% yoy). Exports, on the other hand, grew 2.5% in Q3, a slower clip compared to the 6.5% expansion recorded in the previous quarter. The deceleration likely reflected subdued exports from labor-intensive industries. As a result, the external sector’s net contribution to growth swung from a 0.2 percentage-point contribution in Q2 to a 1.4 percentage-point drag in Q3.
All told, the economy’s performance in the October-to-December period reaffirms FocusEconomics panelists’ view of a cyclical recovery in India as the effect of highly disruptive reforms wanes. Nonetheless, the country’s economy will continue to navigate choppy waters in the quarters to come amid increased market volatility, deteriorating external metrics and a higher likelihood the RBI will shift from a neutral to a hawkish stance following the third quarter’s better-than-expected figures. In addition, the Central Bank’s recent implementation of tighter norms for the resolution of stressed assets should result in a rise in non-performing loans, which could delay an improvement in credit and private investment growth and throw a wrench in the works of the nascent economic recovery.