GDP, Sept 18 – Analyzing the Performance

After hitting a high of 8.2% in June 18 quarter (Q1’FY19), GDP growth has slowed to 7.1% in Sept’18 quarter (Q2’19) as per the data released by MOSPI today. GVA growth rate is also in the same line at 6.9% against 8.0% in Q1. Even though the rate has moderated over previous quarter, it is fourth quarter of 7%+ growth and gives sense of stability to the economy after going through the adjustments due to demonetization and GST. However, issues like sharp rise in crude price rise or disturbance in the financial market may keep the growth rate under check in the current quarter. In terms of absolute value, GDP at constant price is Rs 34 lakh crore and Rs 45.5 lakh crore at current prices.GDP estimation (it may not be correct to call it calculation) is a complex exercise which begins with estimation of GVA first. GVA is separately reported for eight sub segments, namely, Agriculture (etc), Mining, Manufacturing, Electricity & Other Utilities, Construction, Trade (and other services such as Hotel, Transport, Communication), Financial (and Real Estate & Professional Services) and last, Public Administration, Defense & Other Services. Financial services group has nearly 23% weight whereas trade and manufacturing has 17% each. Agriculture and public services account for 10-12% each and the rest have less than 10% weight.
The GVA calculation is based on data inputs such as agricultural production, financial results of listed Companies, central and state government expenditure, performance of key sectors like Railways, Road, Air and Water, Communication, Banking and Insurance. GDP is, then, calculated by adding indirect tax revenue (minus subsidy) to GVA. Tax Revenue used for GDP compilation includes non-GST Revenue and GST Revenue based on GSTR filings. The figures are, then, deflated by appropriate price indices (which is different for each group) to remove the impact of inflation and arrive at GDP/GVA at constant prices. The current series takes year 2011-12 as the base year.
For the current quarter, public administration segment has recorded the maximum growth at 10.9%. The segment is largely driven by government expenditure and provides a cushion in cases when other segments are not doing well. It has recorded average growth of 11.1% over last eight quarters since demonetization against just 7.9% in the earlier period providing some support to the economy. Manufacturing sector growth has come down sharply from 13.5% in Q1 to 7.4% now, probably a slow down due to sharp rise in crude prices. Yet, the rate is reasonable for the sector which is trying to stabilize itself.
Another way to calculate GDP is expenditure side analysis. GDP is classified into three groups – Private final consumption expenditure (PFCE, share 54.5%), Government final consumption expenditure (GFCE, 12.4%) and Gross fixed capital formation (GFCF, 32.3%). The last refers to the money spent on investment. While PFCE has risen by 7%, other two have risen by over 12%. While India has been largely witnessing “consumption” driven growth, lower PFCE is actually good for a country like India. That will help channelize resources into building physical and social productive capacity of the economy through higher GFCF and GFCE. Share of GFCF in total GDP has risen to 32.3% for the quarter after hitting a low of 30.3% in FY16 which is good but not yet sufficient. (The share had reached about 37% during 2006-08). It may be noted that the secret of growth of Chinese economy is GFCF which has been almost 50% for several years.
A word on agriculture and mining, the two primary sectors. Share of agriculture has been declining steadily reaching a level of 10.2% in Q2 from 17.2% in FY12. Even though the average growth rate has moved up to 4.6% over last eight quarters from 1.2% in the previous year, it is still not sufficient. The condition of core farming is even worse as most of this growth has come from livestock, forestry & fisheries which account for over half of the segment’s contribution. The farming sector needs a breakthrough may be, by massive investment in irrigation, mechanization etc which brings about a quantum jump in productivity like the earlier “Green revolution”.
Mining sector also offers some insights although its share is very low at just 3%. The sector has recorded growth of as high as 20.7% in terms of current prices whereas it shows a decline of -2.4% after using price deflator. This is because of sharp rise in crude prices which artificially inflates the value produced by the segment. This reverses when the production is compared on constant price basis.

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