Heavy Rains, Weak Margins May Lower GDP In Q2

If the projections made by analysts are to be believed, then the year-on-year expansion of the GDP will dip to 6.5 per cent in Q2 from 6.7 per cent in Q1, with heavy rains and weak margins offsetting the buoyancy injected by the turnaround in government capital expenditure and healthy trends in kharif sowing. Further, growth in the gross value added is estimated to ease to 6.6 per cent in Q2 from 6.8 per cent in Q1, driven by the industrial sector, amid a pick-up in the expansion in services and agricultural GVA. Based on available data for the Centre and the states’ indirect taxes and subsidies, Icra estimates that the growth in net indirect taxes rose slightly to 9-9.5 per cent in Q2 from eight per cent in Q1. As a result of this, the GDP-GVA growth wedge is expected to remain inverted in Q2 as well.

Experts estimate that the industrial GVA growth will be registering a broad-based moderation to 5.5 per cent in Q2 from 8.3 per cent in Q1, led by electricity, mining and quarrying, manufacturing, and construction. The country’s investment activity improved in Q2 over Q1, while it remained sluggish amid slow execution of infra projects owing to surplus monsoon rains. The GoI’s capital expenditure reverted to a YoY expansion of 10.3 per cent in Q2, following the 35 per cent contraction seen in Q1 led by MoRTH and the Ministry of Railways. While the combined capital outlay and net lending of the 22 state governments, excluding Arunachal Pradesh, Gujarat, Goa, Jharkhand, Manipur and Odisha rose by 2.1 per cent in Q2. However, the pace of expansion remained muted. Additionally, new project announcements witnessed a healthy rebound to Rs. 6.7 trillion in Q2 from a multi-quarter low of Rs. 2.2 trillion in Q1. This was in sync with the historical trends, wherein new proposals picked up sharply in Q2 after the lull seen during the Lok Sabha elections.

The QoQ increase in cost of announcements in Q2 was much stronger by the private sector at Rs. 5.2 trillion from Rs. 1.1 trillion than by the government to Rs. 1.5 trillion from Rs. 1.1 trillion. However, project completions remained subdued in Q2, improving marginally to Rs. one trillion from Rs. 0.7 trillion in Q1, which was partly impacted by monsoons. Analysts estimate that the YoY expansion in services GVA to rise to 7.8 per cent in Q2 from 7.2 per cent in Q1, amidst a mixed trend in the high frequency indicators. Supported by the favourable trends for kharif sowing and early estimates depicting a 5.7 per cent growth in kharif foodgrain output, as well as a low base, experts are hopeful of GVA growth of agriculture, forestry and fishing, which they project at 3.5 per cent in Q2 from two per cent in Q1. The benefits of the healthy monsoons lie ahead with upbeat kharif output and replenished reservoirs likely to herald a sustained improvement in rural sentiment.