The first advance estimates of gross value added for the financial year 2017-18 are significantly lower than our (and street) expectations, and gross domestic product growth estimates, moderately so. However, these estimates should be interpreted with caution, as the press release section on the methodology of estimation points out. The forecasts are based on extrapolations from corporate results of the first two quarters of FY18 and from 7-8 months of high-frequency indicators, using relatively simple regression techniques and ratios.
As is known, Q1 and Q2 growth in FY18 was low due inter alia to the pre-GST inventory clearing and attendant uncertainty, and then the post-GST adjustment to the massive structural and reporting changes. Things seem to have improved in Q3.
This activity is expected to improve further in Q4.
A more accurate picture of FY18 growth is expected to emerge with the next revision due at end-January 2018, when even the revised data for FY17 will be released. Within the contours of these constraints on interpreting the data, here are some thoughts on the estimates. From the demand side, the slowdown in government consumption and a modest recovery of investment was expected. The former largely due to the lower than budgeted tax and non-tax revenues, and spends might still pick up with a slight easing of the fiscal deficit targets.
The puzzle is in the lower-than-expected growth in private consumption (relative to FY17 projections) and, to an extent, exports.
After low growth in the first H1FY18, indications are that private (household) consumption has picked up and growth should improve significantly in H2. Export growth is also probably pegged on the lower side. Adjusted for commodities price increases, combined merchandise and services growth will likely be higher than the projected 4.5 percent. From the output side, agriculture growth is likely to be better than the estimated 2.1 percent, particularly if the Rabi harvest is not disrupted by abnormal weather.
The implications for policy response are likely to be as follows. There are already indications that the centre is planning to enlarge the degree of fiscal stimulus and spends in Q4. Trade and industrial policies are also being modified to stimulate activity, but the effects will only be evident in the medium-term. The monetary policy stance, last articulated in December, is unlikely to change with the expected slower growth (and presumably larger output gap). The same uncertainties — global and domestic — still prevail, and inflationary pressures remain strong. However, the market chatter on interest rate hikes is likely to abate for the time being, but there is little scope for a relook at the expected extended pause on rate cuts.
Saugata Bhattacharya is Senior Vice President - Business and Economic Research at Axis Bank. Views are personal.
The views expressed here are those of the author's and do not necessarily represent the views of BloombergQuint or its editorial team.
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