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Indian Economy

The GDP Puzzle

For those of you who have been consuming the business and finance news in the last few days, whatever being the source of your information, have undoubtedly been showered with latest GDP figures for the quarter gone by, pegging it at an impressive 8.2% growth compared with last year’s Q1 performance.

This piece of news has been met with a host of different reactions and opinions, depending on who you ask, the answer could vary. For instance, the optimists view it as a groundbreaking phenomenon which has led to India remaining the fastest growing large economy in the world, with China lagging behind at 6.7% GDP growth in comparison.  Manufacturing was a particularly bright spot, pegged at a nine-quarter high of 13.5% growth. Finance Minister Arun Jaitley heaped praise, saying the performance was in spite of global turmoil and it represents the potential of new India, going on to say that reforms and fiscal prudence implemented by the NDA government deserve mention. On the other hand, the pessimists attribute this figure of 8.2% growth to a favourable base effect of last year’s figure, claiming that it is not sustainable in the future and further point out that the crucial services sector, which includes trade, transport, finance, real estate etc. slowed from 7.7% in Q4 F.Y.18 to 7.3% in current quarter. The news on the economic growth rate was impressive, but it did not cut ice with the stock market, whose indices fell in the aftermath of its announcement.

So, what did the markets see that the optimists failed to point out? One very important aspect of the overall picture is the fiscal deficit reading. Fiscal deficit is the deficit incurred when total government expenditure exceeds its total revenue but does not take into account borrowings by the government. Think of it as a total revenue (excluding borrowings) and expenditure (including capital expenditure) account of the government. The fiscal deficit is a crucial macroeconomic indicator; the government sets itself a target for the entire year which was 6.24 lakh crores for the current financial year. A reasonable deficit is seen as a healthy indicator for any economy. A fine print reading of this figure indicated that the fiscal deficit came in at 5.40 lakh crores for the four months ended July 2018, which is 86.5% of the entire F.Y. 19 period. Higher oil prices and a depreciating rupee were the chief culprits.

Another macro indicator closely related to the fiscal deficit is the trade deficit, which is the difference between the value of exports and imports of the entire country. Current account or trade deficit is also higher than levels seen as comforting by the government, again on the back of rising oil prices and moderate growth in exports. The three pillars on which GDP growth can be analyzed is domestic consumption, investment demand and external demand. Analysis of these three segments gives us an insight as to what kind of growth the GDP figure suggests.


Sr No.

Factor Current quarter growth Q1F.Y. 19 Previous quarter growth Q4 F.Y. 18 Percentage (%) of GDP Remarks


Private Consumption




(increase from 54.6% in previous quarter)

Private consumption rose in spite of unfavourable base


Investment Demand



31.6% of GDP

(decrease from 32.2% in the previous quarter)

Gross fixed capital formation showed a loss in momentum in spite of favourable base



3. External Demand

(Current Account Deficit)

$ 15.8 billion $ 13.7 billion 2.4% of GDP

(increase from 1.9% of GDP)

Trade deficit (CAD) has shot up sharply due to oil prices and a weak rupee


A post-mortem analysis suggests that the GDP growth has been led by consumption growth, more specifically private consumption growth. A rise in the level of personal lending, as suggested by RBI’s annual report confirms this fact. General elections being around the corner, the government tends to spend on rural infrastructure to attract votes from that demographic. This creates jobs in the rural sector and leaves them with a greater disposable income, therefore an increase in consumption-led growth, at least from the rural segment comes as no surprise. The only pain point of a consumption-led growth is the fact that it leads to an increase in inflation, which is already expected to rise sharply as per RBI’s estimates. Inflation is one of the primary concerns for RBI hiking interest rates.

In a period where we are constantly reminded of worsening macro indicators such as rising oil prices, a plummeting rupee, trade war concerns, hardening bond yields, increasing inflation and widening current account deficit, it’s a pleasant surprise to see GDP at a nine-quarter high growth rate of 8.2%. Even though one would have liked to see a stronger investment and external demand-led growth for the GDP, let’s bask in the glory of the moment and enjoy our accomplishment, albeit for the moment. As the age-old adage goes, “pray for the best but prepare for the worst”.









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