MUMBAI: Economic activity has picked up during the first quarter of the current fiscal, but weak agricultural growth could play a spoilsport, said SBI Research. However, the front-loading of subsidies during the first quarter could eliminate the gap between GDP and GVA perhaps for the first time in several quarters, the research arm noted.
As per the SBI Composite Leading Indicator, which includes a basket of 18 indicators, economic activity has picked up substantially in Q1 and GVA could print at 7.6 per cent.While agricultural sector output leaves much to be desired, major indicators including cement production, passenger traffic, sale of both commercial and passenger vehicles (PV), non-food credit growth and aircraft movement are driving GVA.
PV sales growth, an indicator of urban demand, strengthened in last three months, while that of commercial vehicles was robust. Domestic air passenger traffic maintained a double-digit growth, and the sustained increase in cement production indicates that construction activity picked up pace.
“Even though GVA growth could be around 7.6 per cent, supported by a robust manufacturing and service sector growth, we are not entirely hopeful regarding the agriculture sector in Q1FY19,” said Dr Sowmya Kanti Ghosh, Chief Economist, SBI Research. He added that agriculture sector needs an immediate intervention like Bhavantar scheme apart from the MSP scheme.
“Agriculture prices continue to remain depressed and it’s unclear how the MSP may lift prices in the absence of an effective procurement scheme. Herein lies the benefit of Bhavantar scheme that has no procurement liabilities. Our estimates show that an income support scheme like Telangana may be rolled out in states like Bihar, Assam, Chhattisgarh, Haryana, Punjab, Jharkhand and Uttarakhand, where the cost is not prohibitive,” he explained.
Finally, if GVA prints at 7.6 per cent in the first quarter, Ghosh believes that GDP could come in at 7.7 per cent, considering the front-loaded subsidy in Q1. In other words, it implies that the gap between GDP and GVA may just vanish in the first quarter.
Going by the quarterly trend of subsidy expenditure, the government has been front-loading larger chunks compared to other quarters. During Q1, subsidy expenditure to the tune of Rs 1,16,820 crore has also been front-loaded.
“We believe, by front-loading subsidy amount in Q1 may have some impact on Q1 GDP figure and the gap between GDP and GVA might come down to some extent in Q1 as compared to remaining quarters in FY19,” Ghosh noted.
Meanwhile, manufacturing GVA and corporate GVA (defined as sum of PBIDT and wages/salaries) are strongly positively correlated. Corporate GVA, which decelerated since Q4 FY17, rebounded in Q1 FY19 and has exhibited positive growth of 8 per cent.