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The gross domestic product (GDP) at factor cost (constant prices) expanded 4.4 per cent year-on-year in the first quarter of 2013-14, down from 5.4 per cent y-o-y in 2012-13 Q1.
The key reason for the sluggish GDP growth has been nearly flat industrial sector (first quarter 2013-14: 0.2 per cent growth). Both the manufacturing and mining & quarrying sub sectors recorded negative growth in first quarter 2013-14.
The mining sector has been dogged by court rulings and regulatory/policy issues, and the manufacturing sector has been facing sustained weakness in both consumption and investment demand.
Based on the pace of current economic activities, growth in the second quarter of 2013-14 is expected to be in line with the growth trajectory of the last few quarters.
However, a revival of growth looks possible from the third quarter of 2013-14, mainly due to the green shoots from higher rural consumption due to a favourable monsoon, initial signs of exports revival and developments in the global economy.
Global demand plays an important role in the manufacturing sector’s growth, as witnessed during 2003-04 to 2008-09. The proportion of net exports in the first quarter of 2013-14 was negative 9.92 per cent as against the average proportion of negative 4.3 per cent during 2004-05 to 2008-09.
Although, the July 2013 exports growth data and the recent economic data of the US, the Euro Zone and Japan augur well for exports and industrial growth, it is still too early to take it as a firm trend of improving global demand conditions.
Despite a decline in wholesale inflation to 4.7 per cent in the first quarter of 2013-14 (lowest since fourth quarter 2009-10), private final consumption expenditure growth has continued to falter. It has slowed down to 1.6 per cent in the first quarter of 2013-14, the lowest level in witnessed in the last eight years.
However, the Government consumption expenditure growth at 10.5 per cent in the first quarter of 2013-14 was highest in the last seven quarters.
This is corroborated by the 22.7 per cent growth in Union Government expenditure in first quarter 2013-14.
The depreciating rupee and improving global demand conditions have brightened the prospects of exports growth.
However, the falling rupee and increasing crude oil prices due to geopolitical risks will result in higher fuel subsidy leading to expansionary budget and higher services sector growth.
If the fiscal deficit target of 4.8 per cent of GDP for 2013-14 is achieved by curtailing Plan expenditure, it will affect not only investment activity in 2013-14 but also medium-term growth.
The last but not the least, the services sector growth at 6.6 per cent in first quarter 2013-14 is at the same level as was witnessed in the fourth quarter of 2012-13.
The overall sector performance would have been hit but for the 22.7 per cent growth in Central Government expenditure in Q1 of 2013-14. This was reflected in the growth of community, social and personal services.
The pace of growth of trade, hotels, transport and communication declined to 3.9 per cent in Q1 from 6.2 per cent a quarter ago and 6.1 per cent a year ago. However, financing, insurance, real estate and business services grew at a robust pace of 9.4 per cent in first quarter 2013-14 from 8.9 per cent in first quarter 2012-13.
This was instrumental in offsetting sluggishness in the trade, hotels, transport and communication sub sectors.
The key for the revival of growth would be improvement in the investment climate.
However, investments in economy contracted by 1.2 per cent in the first quarter of 2013-14.
This has been the first contraction since first quarter of 2012-13, when investments fell by 2.2 per cent.
Investment activities will remain sluggish, unless the policy issues affecting the investment environment are not resolved quickly.
In this regard, the passing of the land acquisition bill by the Lok Sabha is an important step but many more hurdles have to be removed before we could see any turn around in investment demand.
(The authors are Chief Economist and Director, India Ratings & Research (Ind-Ra) respectively. The views are personal.)
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