India: GDP growth regains some traction in Q2 FY 2017
November 30, 2017
The Indian economy made significant headway in the second quarter of FY 2017 as the impact of two major, but highly disruptive, reforms—the implementation of the Goods and Services Tax (GST) and demonetization—began to gradually fade away. GDP expanded 6.3% in year-on-year terms in Q2 FY 2017, which runs from July to September. The increase came in marginally below expectations but marked an improvement over the three-year low 5.7% rise recorded in Q1 FY 2017.
The pick-up largely reflected resilient private consumption and healthier capital expenditure levels. Fixed investment accelerated markedly from a 1.6% year-on-year increase in Q1 FY 2017 to a robust 4.7% expansion in Q2, the highest figure in over a year. Higher fixed capital formation reflected easing concerns surrounding the implementation of the GST and demonetization as well as improving operating conditions in manufacturing.
Household spending growth eased modestly to 6.5% in annual terms in Q2 FY 2017 from 6.7% in the previous quarter but continued to contribute strongly to overall growth. The expansion in private consumption was supported by improved post-GST sentiment, moderate inflation and a boost from an early festival season in September, but likely reflected softer rural demand due to weak crop production. Government consumption moderated notably to a 4.1% increase in Q2 (Q1 FY 2017: +17.2% year-on-year) as the government acted to put a stopgap to the spending spree seen in the first quarter.
The external sector continued to drag on growth, although the extent at which it did so was halved from the previous quarter in Q2 FY 2017. Export growth remained sluggish at 1.2%, matching the increase seen in the previous quarter. Import growth, however, decelerated markedly to a 7.5% increase in Q2 from the 13.4% surge seen in the previous quarter, when consumers front-loaded purchases before the introduction of the GST. Steady export growth but weaker import growth caused the sector’s net drag on growth to shrink from minus 2.6 percentage points in Q1 FY 2017 to minus 1.3 percentage points in Q2.
Overall, the GDP print suggests an economic recovery is well underway in India. Leading indicators for October were largely discouraging, although seasonal factors were at play and economy activity is expected to have firmed back up in November. In addition, recent measures to ease the GST compliance burden for exporters and recapitalize public banks should buttress growth in the second half of the fiscal year.
India GDP Forecast
FocusEconomics Consensus Forecast panelists see the economy picking up in fiscal year 2017 and growing 7.2%, which is unchanged from last month’s forecast. In FY 2018, our panel expects GDP to expand 7.6%.
Author: David Ampudia, Economist