India’s Q4 2018 GDP growth exceptional at 7.7%

June 1, 2018

NEW DELHI - The acceleration in India’s Q4 GDP was exceptionally sharp at 7.7%, with growth predominantly boosted by Government consumption and public infrastructure spending. Investment clocked growth of 14.4% y/y in Q4 FY2018, due to a step-up in public infrastructure spending. This was also reflected in the construction GVA (gross value-added), which printed growth of 11.5% y/y during the quarter (vs 6.6% y/y in Q3 FY2018).

ANZ Bank says that, in its view, the same continuing pace of growth in investment is unlikely, unless private investment recovers.

The bank says the role of fiscal policy was also evident in Government consumption data, which recorded 16.8% y/y growth in Q4 FY2018.

Private consumption also improved to 6.7% y/y in Q4 FY2018 from 5.9% y/y previously. This marked the first pick-up in private consumption after four successive quarters of moderation.

Growth in GVA was broad-based, led by public administration, which clocked growth of 13.3% y/y in Q4 FY2018 from 7.7% y/y previously. Manufacturing and agriculture sector also displayed healthy growth.

For full year FY2018, GDP growth slowed to 6.7% in FY2018 from 7.1% in FY2017.

ANZ says the moderation in growth in FY2018 was driven by two factors: 1) effects from successive policy shocks of demonetisation and the Goods and Services Tax (GST); and 2) twin balance sheet problems of high corporate leverage and banks’ stressed balance sheets.

“Fortunately, India’s growth performance in Q3 and Q4 FY2018 suggests that these shocks have significantly worn off,” the bank’s research report says.

“Looking ahead, our FY2019 GDP forecast of 6.9% clearly faces upside risks.

“Rural growth is expected to recover if the monsoon turns out to be normal, as forecast. Higher frequency data such as auto sales, consumer lending, and corporate sales suggest that private consumption is likely to strengthen further.

“However, private investment is unlikely to boost growth substantially over the next few quarters, given the high level of slack capacity and lending constraints in the banking sector.

“The combination of stronger growth and higher inflation make a strong case for policy tightening. Accordingly, we expect the Reserve Bank of India (RBI) to raise its policy repo rate by 50bps in 2018,  with the first hike of 25bps at its meeting next week.” (ATI).