India’s economic growth slows down in Q1 FY2018, underlying growth likely to remain moderate

India’s first quarter economic growth for the fiscal year 2018 considerably undershot market expectations. India’s GDP growth decelerated in the April to June quarter to 5.7 percent amidst a sharp drop in manufacturing activity. On a quarter-on-quarter basis, the economic growth moderated to 1 percent from 1.8 percent in the previous quarter.

The momentum was dampened by net exports and weak investments. Net exports subtracted 2.4 percentage points from GDP, while investments contributed just 0.5 percentage points to the GDP. Consumption growth continued to be stable as the moderation in private consumption was countered by sound growth in government demand, noted ANZ in a research report.

Meanwhile on the production side, the manufacturing sector saw its weakest growth in almost two years. The slowdown was due to sub-par capacity utilization in the sector and destocking by producers ahead of the GST implementation in July. Meanwhile, the services sector saw a rebound led by growth in the “trade, hotels and transport” sub segment.

A revival in investment is unlikely anytime soon amidst the twin balance sheet problems of an over-leveraged corporate sector and a stressed banking sector, stated ANZ. Additional impact is expected to arise from scaling down of capital spending by the state governments to accommodate farm loan waivers. Consumption is expected to stay supported with a normal monsoon boosting agriculture and rural demand. The Indian economy is expected to grow 6.2 percent for the whole of FY2018, according to ANZ. The underlying growth is expected to stay moderate, mirroring the trend in core inflation.

“We continue to expect the Reserve bank of India (RBI) to cut policy repo rate by 25bps in October”, added ANZ.

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