India’s blowout 8.4% GDP figure masks signs of slower growth

India’s economic growth accelerated to more than 8% in the final three months of last year, beating all forecasts by economists just months before an election, even though one key figure showed slowing momentum.

Gross domestic product rose 8.4% from a year ago, the Statistics Ministry said Thursday, buoyed by strong private-sector investment and a pick-up in services spending. GDP figures for the previous two quarter’s were revised to above 8% as well.

Analysts pointed to a surge in taxes as a possible reason for the unexpected jump in GDP. The ministry’s figures for gross value added — which is GDP plus subsidies, minus taxes — showed a slowdown to 6.5% in the fourth quarter from a revised 7.7% in the previous three months.

Madhavi Arora, an economist with Emkay Financial Services, said the sharp divergence between the two metrics was “difficult to fathom.” She said it likely reflects higher growth in general government net indirect taxes, possibly with lower subsidies.

Economists cautioned against placing too much optimism on the GDP number, saying GVA growth was a better measure of underlying momentum in the economy.

Financial markets, though, were upbeat following the data, with the benchmark Sensex index advancing as much as 0.9%. The rupee gained.

The divergence sets up a debate over whether the Reserve Bank of India will stay on guard as it tries to bring inflation down to its 4% target. The central bank has kept interest rates unchanged and stuck to a relatively hawkish policy stance for several months, although some policy committee members argue that keeping borrowing costs too high could stifle economic growth.

What Bloomberg Economics Says…

We pushed back our base case for a rate cut to August from June after the Feb 22. release of the RBI’s meeting minutes. But we now believe the optimal policy response for the central bank would be to start easing as soon as April. — Abhishek Gupta, India economist

The government now predicts growth will reach 7.6% in the fiscal year through March, higher than an earlier projection of 7.3%, keeping India on track to remain the fastest-expanding major economy in the world. That’s buoyed sentiment in the nation’s stock market and gives Prime Minister Narendra Modi a boost as he contests elections likely to kick off in April.

“The revisions in the recent growth data show India is already an 8% growth economy and accelerating, which sets it apart from the rest of the world,” Rahul Bajoria, an economist with Barclays Bank Plc, said by message. “Investment numbers suggest an ongoing pickup in capex momentum.”

Key highlights of the data
Manufacturing growth eased to 11.6% in the fourth quarter from 14.4% in the previous three months Growth in services sectors accelerated to 6.7% from 4.5% Private consumption rose 3.5% from a year earlier, while government expenditure contracted 3.2% Investment surged 10.6% in the quarter from a year earlier Agriculture contracted 0.8% given adverse weather conditions. India recorded the weakest monsoon rains in five years, forcing the government to extend curbs on exports of farm commodities such as sugar, rice and wheat.

Key highlights of the data

Manufacturing growth eased to 11.6% in the fourth quarter from 14.4% in the previous three months
Growth in services sectors accelerated to 6.7% from 4.5%
Private consumption rose 3.5% from a year earlier, while government expenditure contracted 3.2%
Investment surged 10.6% in the quarter from a year earlier
Agriculture contracted 0.8% given adverse weather conditions. India recorded the weakest monsoon rains in five years, forcing the government to extend curbs on exports of farm commodities such as sugar, rice and wheat.

V Anantha Nageswaran, India’s chief economic adviser, said strong domestic demand and private investments will continue to drive growth. “The Indian economy is ticking many boxes in the right manner,” he told reporters in New Delhi on Thursday.

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