As I expressed in my previous post, CSO released the GDP estimate for Q4 2009-10 and FY 2009-10 . Gross Domestic Product (GDP) for Jan- Mar 2010 quarter was at 8.6% (year on year) and for FY 2009-10 at 7.4%. Here is a detailed analysis of the same. (Warning: It is a longish post)
Gross Domestic Product (GDP) for Jan- Mar 2010 quarter was at 8.6% (year on year). The growth rate was in line with market expectations. GDP for Oct-Dec 09 was revised upwards from 6% to 6.5% on account of revision in agriculture and services growth. AIn Oct-Dec 09 quarter, agriculture growth was revised upwards from -2.8% to -1.8% and services from 6.2% to 7.3%.
|Table 1: GDP Quarterly Growth at a Glance (in %, YoY)|
|Apr-Jun 09||Jul-Sep 09||Oct-Dec 09||Jan-Mar 10|
|Mining & quarrying||8.2||10.1||9.6||14.0|
|Electricity, gas & water supply||6.6||7.7||4.7||7.1|
|Trade, hotels, transport & communication||5.5||8.5||10.2||12.4|
|Financing, insurance, real estate & business Services||11.8||11.5||7.9||7.9|
|Community, social & personal services||7.6||14.0||0.8||1.6|
With Jan-Mar 10 numbers, CSO also released growth rates for FY 2009-10. In Feb 2010, CSO had estimated growth for 2009-10 at 7.2%. The annual growth for 2009-10 has been revised upwards to 7.4%. As table 2 shows, it is on account of higher revision in growth rate of agriculture and industry (explained below).
Table 2: GDP Annual Growth at a Glance (in %, YoY)
|2008-09||2009-10 (advanced estimate)||2009-10 (Revised Estimate)|
|Mining & quarrying||1.6||8.7||10.6|
|Electricity, gas & water supply||3.9||8.2||6.5|
|Trade, hotels, transport & communication||7.6||8.3||9.3|
|Financing, insurance, real estate & business Services||10.1||9.9||9.7|
|Community, social & personal services||13.9||8.2||5.6|
Production approach or Sector-wise growth
- Quarterly analysis: It increased by 0.7% in Jan-Mar 10. The growth looks on the lower side (Table 3) as as Rabi production was expected to be better in 2009-10. Rabi production target was kept at 113.95 million tonnes for 2009-10. In second advance agriculture estimates, Rabi production was revised upwards to 117 MT but was revised lower to 115.85 MT in third advance estimates. This was because of lower expected production in cereals like Barley, Maize etc.
- Annual analysis: Agriculture growth for 2009-10 is at 0.2%. As indicated above, it has been revised upwards from -0.2% given in CSO’s advance estimate released in Feb-2010.
The growth was revised upwards on account of better than expected growth in Oct-Dec 09 quarter.In third advance estimates, total Kharif foodgrain production is higher than second advance estimates by 2.5%. This was because of both food crops like kharif crops like Rice, Jowar, etc and non-food crops like sugarcane, jute, cotton etc. About 82% of Kharif production is included in Oct-Dec 09 quarter, so we see an upward revision in Oct-Dec 09 and subsequently in FY 2009-10.
It has been quite a contrasting year for Rabi and Kharif crop. As there was a severe drought, Kharif production was expected to suffer. However, because of late rains in September -09 it recovered Though, production is still lower than target by 18.2%, it has been revised upwards in both second and third advance estimate.
The case for Rabi was opposite withg lower revisions in third advance estimate (in first advance estimate, expected rabi production is not given) Though, it is higher than target, still has been revised lower in subsequent estimate.
Given all this, it is important to keep a focus on the bigger picture. Planning Commission has kept an annual growth target of 4% for agriculture in the Eleventh Plan. The target has been put to provide impetus to agriculture and bring investments in this sector. Around 70% of the population depends on agriculture, so growth is needed in agriculture for sustaining a large percentage of population as well. The Eleventh plan is from the period 2007-12. In the first three years of the eleventh plan, the average growth stands at 2.2%. This is highly disappointing and much more needs to be done to improve agriculture trends.
- Quarterly analysis: Industrial growth for Jan-Mar 10 was at 15.1%. It continues to pick up sharply from Jul-Sep 09 quarter onwards. It slumped in Oct-Dec 08 quarter following the global crisis and has recovered smartly in 2009-10. Earlier, the graph of industrial growth showed recovery as a V shaped one. Now it resembles a tick mark shaped one.
Industry is divided into 3 sectors –
- Mining & quarrying,
- Manufacturing and
- Electricity, gas & water supply.
As, we can see growth in all three sub-sectors is higher in each subsequent quarter.
In first half of FY 2009-10, much of the industrial growth was because of various stimulus measures taken by Government. Government took several measures – like NREGA, Sixth pay Commission, excise duty cuts etc – to stimulate Indian economy because of the global crisis. These measures led to increase in income which led to a surge for demand for durable goods like Washing Machines, Television, etc. Durable goods continue to grow in double digit growth rates since April 2009. The stimulus began to decline from October 2009 onwards, but growth in consumer goods continues to remain in double digits. The average growth rate in consumer durable goods in Oct-Dec 09 and Jan-Mar 10 was at 34.7% and 31.2% respectively. In October and November it was because of festival season and from December 2009 onwards it could be because of pick up in economic activity.
From October 2009 onwards, IIP data showed growth across all sectors. Growth was particularly impressive in capital goods which has grown at an average of 42.4% in Jan-Mar 10.
- Annual analysis: Industrial growth for 2009-10 is at 10.4%, much higher than advance estimate of 8.8%.
CSO had estimated the growth trends for 2009-10 based on average growth seen in April-November 2009. IIP-manufacturing registered a growth rate of 7.7% in April-November 2009 and hence CSO estimated industry growth for 2009-10 at 8.9%. However, average growth of IIP for April-March 2010 was much higher at 10.9%, leading to a much higher growth in GDP-manufacturing sector at 10.8. Same was the case for mining and electricity sub-sectors as well.
- Quarterly analysis: The growth in services in Jan-Mar 10 quarter was at 8.5%, higher than 7.3% seen in Oct-Dec 09 quarter. Services is divided into 4 sectors
- Trade, hotels, transport & communication,
- Financing, insurance, real estate & business services
- Community, social & personal services.
Growth in construction and trade & hotels services has picked up with overall increase in economic activity and business sentiment. The growth in financing services sector has remained steady and has not grown because of continued uncertainty in financial markets. Growth rate in Community, social & personal services has declined sharply as fiscal stimulus has eased.
- Annual analysis: Growth in services is at 8.3% in 2009-10. It is lower than advance estimate growth of 8.5%.
Sub-sector wise analysis shows growth is lower than advance estimates because of lower growth in Community, social & personal services. CSO says this is because of lower than expected government expenditure. In April-December 2009 central government expenditure showed a growth of 18.5% which was extrapolated in the advance estimates. However, as per revised estimates government expenditure showed a rise of 15.6% in 2009-10.
This is also the popular approach used in Economics Textbooks
Y = C + I +G + X-M
Where Y = Income or GDP
C = Household consumption
I = Private sector Investment
G = Government Expenditure/Investment
X = Exports
M = Imports
Quarterly analysis: If we look at the expenditure-wise growth rates, we can see the decline in government expenditure. Growth in government expenditure has declined from 30.5% in Jul-Sep 09 to 2.1% in Jan-Mar 10.
|Table 3: Quarterly GDP growth rates: Expenditure Approach (in %)
|Apr -Jun 09||Jul – Sep 09||Oct- Dec 09||Jan-Mar 10|
|Government Expenditure (G)||15.3||30.5||2.5||2.1|
Growth of household consumption continues to decline in each quarter. Investments growth has picked up sharply and is at 17.7%. This is a very positive development. In the high growth period of 2003-08, when average GDP grew by 8.9%, the driver was growth in investments. The average investment growth in the period was 17.1%. As government expenditure declines, increase in private investment needs to take place which is happening. The increase in investment is not on account of base-effect but actual volumes have also surged.
The exports and imports have improved from November 2009 onwards and the same is reflected in the GDP trends as well.
- Annual analysis: We see growth in consumption is broadly in line with advance estimates. Whereas growth in government expenditure, investments, exports and imports is higher than advance estimates. This is puzzling as based on above analysis we should be seeing a lower growth in government expenditure in revised estimates. It could be because of statistical discrepancy.
Table 4: Annual GDP Growth rates: Expenditure Approach (in %)
|2008-09||2009-10 (advanced estimate)||2009-10 (Revised Estimate)|
|Government Expenditure (G)||16.7||8.2||10.5|
It is important thing to note is the GDP growth when calculated by expenditure approach is different from production approach. GDP Production approach shows growth of 7.4% for 2009-10 but is at 7.7% by expenditure approach. The difference is quite large at most of the times. This is because of the complexities in the statistical system. India is a large country and the differences are bound to persist if we calculate GDP from two different approaches. Conceptually both should show similar growth numbers but is not possible practically. The methodology to compute GDP from Production approach is more robust and is taken for computing GDP growth rates.
Overall, GDP numbers portray a comforting picture. The government’s share in GDP growth has declined and private sector investment has picked up. The economy looks on course to achieve 9% growth rate. Most think-tanks and institutions have put Indian growth for 2010-11 at 8.5% plus.
|Table 5: Projections of GDP Growth by various agencies for 2010-11 (in %, YoY)|
|RBI||7.5 with an upward bias||8 with an upward bias|
|PM’s Economic Advisory Council||7.2||8.2|
|Ministry of Finance||7.2||8.5 (+/- 0.25)|
|RBI’s Survey of Professional Forecasters||7.2||8.5|
Though, external risks remain to the outlook. The ongoing turmoil in Europe can upset the growth momentum. Looking at inflation, IIP and now GDP, RBI is expected to continue to hike interest rates, but will keep a close watch on global conditions.