Q2- Analysis

Second quarter (Q2) was filled with dramatic events but the effects on Indian
economy is very less till now. The growth in Gross Value Added(GVA) has
decelerated from 7.3% in Q1 to 7.1% in Q2. The financial, insurance, real estate
and professional sectors accounted for 19.87% of the growth in GVA over the
previous year period. Public administration, defence and other services, which is
mainly government spending, contributed the second largest chunk of growth, at
23.8% of total GVA growth. Economic growth in India gained momentum in the
second quarter of fiscal year 2016, but dynamics remained lopsided.
GDP increased 7.3% annually in the July to September period. private
consumption was the main economic engine, picking up from 6.7% growth in Q1
to 7.6% in Q2. A near normal monsoon and public pay hikes have been acting as
tailwinds for households. Government spending was solid, expanding at a
double-digit pace (Q2 FY 2016: +15.3% year-on-year; Q1 FY 2016: +18.8% yoy).
However, fixed investment contracted sharply, recording the worst result since
Q1 FY 2012 (Q2 FY 2016: -5.6% yoy, Q1 FY 2016: -3.1% yoy). Meagre lending
growth from banks amid stress on both lenders and corporate balance sheets
has caused investment to shrink.
The external sectors performance was broadly unchanged as a whole, with the
contribution to growth stable at Q1s 2.0 percentage points. Exports of goods and
services lost steam, growing 0.3% after a 3.2% increase in Q1. Meanwhile, the
contraction in imports worsened and was 9.0% in Q2 (Q1 FY 2016: -5.8% yoy).
The GDP numbers on the net expenditure side bear out the larger contribution of
government spending. Government final consumption expenditure was up 13, at
constant prices. The contribution of government final consumption expenditure
to total GDP growth was as high as about 25%.
Overall, GDP data suggest that the economy remained on solid footing, driven
largely by booming consumption. However, economic activity is likely to take a
hit in the third quarter as the governments currency demonetization disrupts
cash transactions and lack of robust activity from private sector.