GDP growth in India: Moving out of the trough
3QFY14 GDP growth in India at 4.7% signals a likely move out of the trough for India. However, growth is unlikely to see any sharp recovery in the short term as the benefits of the reforms process of the past 12-15 months would take time to feed into the real economy. Investment cycle recovery is yet to come and any sustainable recovery would necessarily be slow. For FY2014 and FY2015, we maintain our GDP growth estimates at 4.8% and 5.1% respectively.
India is likely out of the woods but not out of danger
With the growth continuing to be on our estimated trajectory, we maintain our stance that India has likely seen the trough in growth. It is unlikely that growth would touch sub-4.5% in the next few quarters. With some positive base effects aiding the cause along with stabilization in the industrial sector growth, Indias GDP growth is likely to hover around the 5% mark (Exhibit 1). However, we note that a sharp recovery will depend on the investment cycle revival. While the Government has been on the right path with the reforms, the effect on the real economy would take time considering the gestation period of projects and need for stability in policymaking. For 4QFY14, we expect GDP growth to be at 5.1% with some downside bias depending on the extent of Government expenditure cuts and its effect on the national accounts.
Mining and manufacturing yet to see an upside
In line with weaker IIP growth during the quarter, industrial sector growth contracted by 0.7% in 3QFY14 after a strong print of 2.3% in 2QFY14. A significant 2.8 ppt quarterly downtick in manufacturing (contracting by 1.9% yoy) was not surprising. While mining sector continued to contract for the seventh consecutive quarter by 1.6%, growth in electricity was relatively buoyant at 5% while construction growth remained muted at 0.6%. The weakness in 3QFY14 industrial growth was mimicked by gross fixed capital formation growth contracting 1.1%.
Services sector likely to remain relatively muted
Services sector growth in 3QFY14 saw significant buoyancy as the revised FY2013 GDP releases provided a positive base effect. However, finance, insurance, real estate and business services sector continued to see strong growth with 3QFY14 growth at 12.5% compared to 10% in 2QFY14. Social and personal services sector growth also picked up to 7% in 3QFY14 from 4.2% in 2QFY14. However, this can be attributed to a low base given that the Government had cut expenditure sharply in 3QFY13. We note that our GDP estimate of 4.8% will depend on the expenditure cuts in 4QFY14 by the Government to meet its fiscal deficit estimates (along with some revenue increase). To this extent, we could see lower growth (to some extent offset by expenditure cuts done in 4QFY13) in this sector in 4QFY14.
Expect no change in RBI stance on April 1
With growth-inflation trajectory panning out broadly in line with our estimate (and likely RBIs own estimate), we do not expect any change in repo rate on April 1. We note that Dr Rajan in a recent speech highlighted that (1) do not believe the policy rate is set at a level where it can affect demand, one way or the other and (2) the RBI prefers to disinflate over time rather than abruptly, while being prepared to do what is necessary if the economy deviates from the projected inflation path. In fact, he stated that as of now, we believe the rate is appropriately set. With headline CPI inflation continuing to stay on the projected trajectory and move down to 8% by end-FY2015, the RBI does not have reason to change rates on either side, especially as growth is unlikely to crumble any further, but maintain at the current levels.