Economy slows, investment stagnates in Q2

The Indian economy slowed to 5.3 per cent during Q2 from 5.7 per cent during Q1, even as the feat was marginally better than 5.2 per cent in Q2 of 2013-14. But, more worryingly, manufacturing, the powerhouse of the economy till recently, stagnated at year-ago level, dashing the hopes of a likely rebound due to 3.5 per cent increase during Q1 (against average erosion in the earlier four quarters). Obviously, considering strong growth in electricity, which fuels manufacturing, the vast production facility suffers from demand-side blocks such as lack of export support, terribly lacking project investment demand as also several structural problems.

Agriculture, forestry and fishing were up 3.2 per cent during Q2. Apart from production of Kharif crops, the growth in the sector reflects the estimated production of fruits and vegetables, other crops, livestock products, forestry and fisheries.

Services quickened to 7.1 per cent from 6.8 per cent in the preceding quarter and 6.3 per cent during Q2 of 2013-14. Trade, hotels, transport and communication, which gets business from the farm and industry sectors, expanded 3.8 per cent (3.6 per cent a year ago).

Project investment
Goss fixed capital formation remained stagnant at year-ago level, continuing the dismal show of earlier five quarters (barring a sporadic 7 per cent spurt during Q1). Whereas more startups are announced, actual project execution has obviously not taken off, notwithstanding investment-friendly policy initiatives of the Modi government on taking stalled projects off the ground and easing policy-related hurdles in several sectors.

The investment rate, as measured by GFCF to GDP at market prices, fell to 28.3 per cent in Q2, from 28.6 per cent in the previous quarter, 29.9 per cent during this quarter a year ago, and recent years’ peak of 33 per cent during fiscal 2007-08. The ebb of 27.2 per cent in investment was reached during Q3 of 2013-14. Despite a double-digits increase in September, capital goods production index declined over Q2, against double-digit expansion during the first quarter.

Interestingly, the rot in project investment is more in terms of investment in plant and machinery and less in infrastructure and real estate investment, as real income from construction appears to be getting back its breadth. The income in construction industry increased 4.6 per cent during Q2, against 4.8 per cent in Q1 and near-stagnation in the last two quarters of the preceding fiscal. Whereas alloy and non-alloy steel production speeded from 1.8 per cent in Q1 to 3.2 per cent in Q2; cement production was up by robust 10 per cent average over these quarters.

Consumption
Private final consumption expenditure increased by 5.8 per cent. Government final consumption expenditure was up 10.1 per cent.

Trends over H1
Evening out quarter-to-quarter variations, the economy and also the investment segment seem to be on the mend. Thus, real GDP at factor cost expanded 5.5 per cent during H1, reversing the decline to 4.6 per cent in H2 from 4.9 per cent in H1 of the fiscal 2013-14. The improvement was widely spread on a y-o-y basis; barring farm sector and finance sector which recorded lower growth than that a year ago.

Project investment fared better with GFCF increasing 3.4 per cent during H1, against decline in H2 and stagnation during H1 of fiscal 2013-14. Construction income rose 4.7 per cent, against 2.7 per cent in H1 and 0.6 per cent in H2 of the previous fiscal.

Private final consumption expenditure increased by 5.7 per cent, against 4.2 per cent in H1 and around 5.5 per cent in H2 of 2013-14. Government final consumption expenditure was up 9.4 per cent (6.5 per cent).

GDP at market prices was assessed at Rs. 57.7 trillion.