Why Q1 GDP saw such dismal growth

The chief statistician feels there should be a rebound after companies integrate and adopt the GST system

Twin factors - de-stocking before the Goods and Services Tax (GST) implementation and a rise in wholesale inflation of inputs - pulled down economic growth during the first quarter of FY18, said chief statistician T C A Anant on Thursday.

The first quarter gross domestic product (GDP) growth touched the lowest in 13 quarters at 5.7 per cent, data showed.

Anant, however, did not think that demonetisation should be linked to the slowdown in growth. Referring to agriculture growth coming down, the chief statistician said while crop production rose, animal husbandry weighed on growth.

De-accumulation of stocks by companies and traders in anticipation of the GST, which was implemented from July 1, explained the poor growth in the manufacturing sector, at 1.2 per cent compared to a robust 10.1 per cent in the corresponding quarter of last year, he said.

“The major reason for growth coming in at 5.7 per cent is manufacturing, where the performance of the corporate sector has been poor. Even though top line sales growth is quite good, there are two elements to low GVA - rise in cost and destocking ahead of GST roll-out.”

Wholesale price index (WPI)-based inflation turning positive this year, versus last year’s contraction impacted growth, said the chief statistician.

The prices of intermediate goods were much higher than last year's, he explained.

“From the second quarter of last year, the narrative of negative WPI changed to the index moving to the positive territory. GVA (gross value added) manufacturing since Q2 has been showing a declining trend.”

Corporate entities pulled down stocks and inventories on account of a price-labelling effect.

Sales were up, positively reflecting in the trade segment, but production was down, pulling down manufacturing.

“Inventory de-accumulation of this level was seen for the first time,” he said.

Trade, hotels, transport and communication posted an 11.1 per cent growth during the April-June quarter, against 8.9 per cent last year in Q1.

Anant, however, expected a revival in inventory stock position in the second quarter of the fiscal year.

“I think in the subsequent 2-3 quarters, we will see a reversal. The sense is that there should be a rebound after companies integrate and adopt the GST system,” said Anant.

The Economic Survey has forecast growth of 6.75 per cent to 7.5 per cent.

On the wide notion that demonetisation impacted GDP growth in the first quarter, Anant said it was not correct to link the two.

“From February, there was no shortage of cash. However, it is also true that we have moved to a transparent regime,” he said.

Agriculture GVA grew 2.3 per cent in Q1 versus 2.5 per cent last year.

“Even though crop production increased, animal husbandry pulled down growth,” explained Anant.

Financial, insurance, real estate and professional services grew 6.4 per cent.

The financial services sector performed well, but real estate pulled down growth.

“Real estate has done poorly on account of a number of factors, including structural uncertainty that constitutes litigation and land-related problems.

As these issues are worked out, which is expected, growth will eventually return to a normal trajectory,” added Anant.

Photograph: Thomas White/Reuters