The 5.7% GDP growth has a huge base effect in it
A 5.7% Q1 GDP growth, and the fact that this is a nine-quarter high, raises hope of a 5.5-6% growth for the full year. This is, however, due to a large base effect as well as several one-off factors. The 3.5% growth in manufacturing, for instance, is largely due to the fact that Q1 last year had a contraction of 1.2%—over the previous eight quarters, manufacturing grew by a total of just 1.6%. While there has been a large growth in sales of two-wheelers and passenger cars in the year’s first quarter—Maruti’s domestic volumes rose 31% in June on top of 16% in May—this comes after several quarters of disappointing growth. Indeed, sales of commercial vehicles that are a leading indicator for sustained growth continue to do badly—commercial vehicle sales at Tata Motors have contracted nearly 27% in the first four months of this year.
The 3.8% agriculture growth, similarly, has been good but relates to the pre-drought period; Crisil has estimated a 1% agriculture growth for the full year. The 10.2% growth in electricity, similarly, comes off a weak 3.8% base for Q1 FY14—apart from the fact that the higher Q2 FY14 base of 7.8% will dampen growth in Q2 FY15, there is the serious problem relating to the severe shortages in coal supplies that need to be addressed in the rest of the year. The construction bump—4.8% versus 1.1% last year—was due to a late monsoon that allowed construction activity to carry on, and exports will stabilise now that US growth is expected to do the same.
How growth pans out in the rest of the year depends on a variety of factors, but how weak the growth impulse is can be best seen in the anaemic credit growth data. To the extent the government is able to ignite animal spirits, investment levels will go up, but little investment growth can take place until India Inc remains debt-laden and the banks cash-strapped—indeed, a large part of investment announcements over the next few quarters are more likely to be related to taking over of existing projects, though if the projects taken over are incomplete and now get completed, this will help boost fresh investments. The government’s biggest hope, of course, lies not in getting new projects off the ground, but in improving efficiencies on the ground—that means getting, for instance, fuel supplies on track, environmental clearances faster, and so on.