Where the growth in Q1 came from

September 1, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

GA man walks his cow under high-tension power lines leading from a Tata Power sub station in Mumbai's suburbs February 10, 2013. REUTERS/Vivek Prakash/FilesDP growth of 5.7 percent in the April-June quarter was unexpected in view of the southward drift of India’s economy over the past two years. No wonder it pepped up the Bharatiya Janata Party-led government at a time when the ruling coalition is listing its achievements after 100 days in office. The question is where this growth came from and whether it will be sustained in future.

India’s economy has been slowing after achieving 9 percent growth three years ago. That was because the Congress-led government failed to fuel the economy. The absence of policy reforms, paralytic governance – combined with persistent inflation – discouraged investment. Growth tapered to 4.7 percent last year.

The Q1 data seems to signal a recovery with growth jumping to 5.7 percent. Some sectors did perform exceedingly well with over 10 percent growth. The first is electricity though its size in the overall economy is small. But it has now come up against stubborn problems like coal shortage, which has harassed the power sector. Coal production is unlikely to increase and the power sector will have to fall back on imports. The 10 percent increase in power generation contributed 3.4 percent to the increase in GDP in the first quarter.

Business services such as finance, insurance, and professional services like IT also exhibited high growth. This sector is a major contributor to GDP and constitutes nearly a fifth of the economy, and developed at a double-digit rate. Consequently, about a third of the increase in GDP has come from this sector alone.

Transport and communication along with community services are the other two large segments of the economy. Transport did not perform that well while community services did so partly. Together, they accounted for 30 percent of the increase in Q1 GDP. As such, nearly two-thirds of the increase in GDP came from the services sector, the major part from business services.

Manufacturing has good potential. It is a large segment of the economy and remained absolutely static the previous year. In the first quarter, its growth picked up to 3.5 percent. If this growth accelerates, it will be possible to generate both GDP and employment.

Does Q1 data signal the beginning of a strong recovery? For that, the critical sector is manufacturing, which till recently has been a doubtful actor possibly because it did not receive proper attention. That seems to be changing. Prime Minster Narendra Modi has underlined the importance of manufacturing and even projected India as a manufacturing hub for the world market. All it needs is easing procedures for doing business.

The Indian economy can regain its verve. Services are performing fairly well and will continue to do so in future. If manufacturing comes into play with reformed policies, GDP growth in 2014-15 can reach 6.2 percent and to 7.4 percent the following year if other sectors follow suit.

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