India: Growth picks up in the second quarter of FY 2016
November 30, 2016
Economic growth in India gained momentum in the second quarter of fiscal year 2016, but dynamics remained lopsided. GDP increased 7.3% annually in the July to September period, which came in above the 7.1% rise recorded in the first quarter. However, the result was worse than the 7.5% expected by FocusEconomics analysts and showed the economy is not firing on all cylinders. Still, India continues to grow the fastest of all major economies in the world.
Looking at the details, private consumption was the main economic engine, picking up from 6.7% growth in Q1 to 7.6% in Q2. A near normal monsoon and public pay hikes have been acting as tailwinds for households. Government spending was solid, expanding at a double digit pace (Q2 FY 2016: +15.3% year-on-year; Q1 FY 2016: +18.8% yoy). However, fixed investment contracted sharply, recording the worst result since Q1 FY 2012 (Q2 FY 2016: -5.6% yoy, Q1 FY 2016: -3.1% yoy). Meagre lending growth from banks amid stress on both lenders and corporate balance sheets has caused investment to shrink.
The external sector’s performance was broadly unchanged as a whole, with the contribution to growth stable at Q1’s 2.0 percentage points. Exports of goods and services lost steam, growing 0.3% after a 3.2% increase in Q1. Meanwhile, the contraction in imports worsened and was 9.0% in Q2 (Q1 FY 2016: -5.8% yoy).
Overall, GDP data suggest that the economy remained on solid footing, driven largely by booming consumption. However, economic activity is likely to take a hit in the third quarter as the government’s currency demonetization disrupts cash transactions. Commenting on the economic outlook, Economist Shashank Mendiratta and Senior Economist Arun Navaratna from ANZ add:
“Demonetisation could shave 120 bps from headline GDP growth in FY2017. India’s bank note reform counteracts our previous sanguine outlook on growth. The move will entail short term disruptions to consumption and cash intensive sectors, particularly the informal sector which accounts for 40% of GDP. We revise downwards India’s GDP forecast to 6.8% y/y in FY2017 versus 8% previously.”