India: Growth moderates in first quarter of FY 2016/17
August 31, 2016
Economic growth in India lost significant momentum in the first quarter of the fiscal year 2016, dragged down mainly by a contraction in fixed investment and disappointing growth in private consumption. GDP increased 7.1% annually in the April to June period, which came in below the 7.9% rise recorded in the final quarter of the fiscal year 2015. The result, which marked the slowest expansion in five quarters, was worse than the 7.6% expansion that analysts had expected. Still, India remains the fastest growing among any major economies in the world.
Looking at the details, one of the key contributors to overall economic growth in the first quarter of FY 2016 was government spending, which was up a strong 18.8% in the April to June period (Q4 FY 2015: +2.9% yoy). This was the fastest increase since 2014 and reflected higher spending in subsidies and infrastructure. However, growth in government spending will moderate in the coming quarters as the government seeks to rein in the increasing fiscal deficit. Also, the newly-approved Goods and Services Tax is not expected to start benefiting government revenues until FY 2017. Private consumption and gross fixed capital formation disappointed in the first quarter. Private spending increased 6.7% in the first quarter of FY 2016, which was a marked slowdown over the 8.3% increase in Q4 FY 2015 due to weaker urban demand. That said, household consumption is likely to gain momentum in the coming quarter as pay increases for government workers and a robust monsoon bolster urban and rural demand.
A concerning result was a second consecutive contraction in gross fixed investment. It fell 3.1% in Q1 FY 2016, faster than the 1.9% contraction in the previous quarter. This suggests that business sentiment remains weak and that the government’s efforts to propel stalled projects, clean up banks and boost public investment have not yet galvanized investment in the private sector. Unlike private consumption, the outlook for fixed investment remains lackluster owing to stress in banks’ and corporate balance sheets. Calls on the government to increase banking sector recapitalization funds will probably grow in the light of new data.
The external sector’s performance improved markedly in Q1 FY 2016. Exports of goods and services increased for the first time since the three-month period to December 2014 (Q1: +3.2% yoy; Q4: -1.9% yoy). Imports contracted further and fell 5.8% in Q1 FY 2016, which was faster than the 1.6% decrease recorded in the previous quarter.
Although there is still a long way to go, the first quarter result casts doubt on the government’s projection that the economy will expand 8.0% this fiscal year. The latest result also puts pressure on Urjit Patel, who succeeds Raghuram Rajan as Reserve Bank of India governor in September, over whether to raise interest rates at the October monetary policy meeting.