GDP growth projection for Q2 and what it means, in charts

The prediction is higher than the Reserve Bank of India’s (RBI’s) 6.5% forecast—but both indicate a moderation from the June quarter’s 7.8% growth, primarily because the favourable base effect is fading out. Sequentially, economic activity is likely to have remained strong despite the risks, economists said.

The resilience in growth will likely be “underpinned by domestic consumption, high levels of capital expenditure, and strong growth in the utilities sectors", Barclays said in a report last week.

Even as growth is expected to outpace RBI’s projection in the second quarter, economists’ median estimate for the full year at 6.2% is slightly lower than the central bank’s prediction of 6.5% given last month. A back-of-the-envelope calculation suggests RBI expects GDP growth to be an average of 5.9% in the second half of the year, while economists’ prediction puts it around 5.1-5.2%.

 

According to ICRA, the impact of uneven monsoon rainfall, narrowing difference with year-ago commodity prices, possible slowdown in capital expenditure ahead of elections, weak external demand, and the cumulative impact of monetary tightening could result in slower growth in the second half.

At country’s ‘service’

While mining, manufacturing, electricity generation and construction are expected to see better growth in the second quarter, services sector may see a moderation. But despite the moderation, it is likely to remain the biggest contributor to GDP growth, as per Barclays estimates, which expects services sector growth to be around 7.7%. In the June quarter, services had grown 10.3%, outpacing growth of 4.7% in manufacturing and 7.9% in construction. Strong growth is also expected from construction, mainly due to robust capex by both central and state governments and lesser disruption in the monsoon months due to low rainfall compared to past years.

On the other hand, the rural economy, especially the farm sector, may see a setback as weather vagaries resulted in delay in sowing activity. “We expect agriculture growth to have remained subdued at 1.5% given the fall in crop production," said Kanika Pasricha, an economist at Standard Chartered Bank.

Election euphoria

With elections approaching, the government has made efforts to not only boost the economy through capex but also to boost consumption through cuts in LPG gas prices and the extension of the free food grain programme. As such, private consumption often gets a boost before elections. “Real private consumption growth going into the general elections has been mixed, with the growth rate generally rising a year before elections but falling subsequently as we approached the election date," Goldman Sachs noted in a report last week. Past data indeed shows an opposite trend in the run-up to elections and after.

 

This could partly be because of disruptions caused by the elections itself, with the elected government starting to work in full swing with the presentation of the full Budget in July. While consumption growth and domestic demand are likely to remain strong, if the previous trends are anything to go by, they may show signs of slowdown in the next fiscal.