The India GDP data and growth numbers released on Monday are broadly in line with our (and street) expectations and are quite impressive compared to the growth performance of other emerging markets, particularly our Asian peers. Other than China (7.9 percent), India?s Q2 Calendar 2009 growth has far outperformed most others, with only Indonesia managing relatively decent positive growth.
But more important than the current numbers, which will be printed at length in this newspaper, are questions of what lies ahead. What is the prognosis of growth for the rest of the year? How will the stimulus programmes play out and drive consumption and investment? What will be the global environment in which India will grow? How will RBI read the growth signals and craft its responses?
The most striking aspect of the GDP numbers today was the sharp slowdown of the community and social services segment, from the 22 and 12 percent growth rates of the two previous quarters to 6.8 percent. This was during a quarter that has seen large borrowings by the Central government, about the same levels as that projected for the July-September quarter. Although it is difficult to pinpoint the proximate causes of the lower increase in the context of the continuing stimulus measures of the government and the RBI, it is possible that a large part of these borrowings were deposited with banks.
We had indeed seen a marked increase in deposits during the quarter, and some of that was earlier attributed to mutual funds. It is likely that with elections mid-way through the quarter, and then the presentation of the Budget, expenditures other than for the maintenance of government might have been deferred.
This is a not a very convincing conjecture, given the published data on fiscal deficits, and the fact that these outlays might have shown up in other segments like construction, without which the respective growth rates could have even lower. But this can serve as a working hypothesis for the question of whether growth rates are likely to sustain, weaken or accelerate over the next three quarters.
There are reasons to expect that the GDP growth, on the whole, will sustain, but not strengthen, over the next few quarters. On the negative side, agricultural output is likely to weaken over the next two quarters, coinciding with the kharif output shortfall, before picking up slightly with the winter harvest. However, analysts have already factored in the effects of a deficient monsoon season, in different degrees, with the attendant downrating of growth forecasts.
Following on from the observations on the government?s expenditure before, this is likely to directly contribute less to later quarters, a large part due to the aforementioned high growth rates of the quarters last year. However, our conjecture is that we are likely to see a higher growth rate in the second quarter data, once expenditures on plan and budgeted projects kick in.
Reinforcing this are signs that credit offtake might not improve quickly and strongly for much of the year. Other than being a sign of slowing demand for credit, and probably economic activity, this will lead to a lower growth rate of the financial services segment (about 7 percent) of GDP.
On the positive side, globally, there are signs that economic recovery will be quicker, and probably avoid a double dip, in most developed markets than earlier expected. This will hopefully improve India?s export prospects over the rest of the year. Given that goods and services exports accounts for around a quarter of India?s GDP, this will gradually put wind in the GDP sails. In addition, with equity markets likely to improve gradually, and with low housing finance rates, there might be a revival of demand for residential housing, which, together with infrastructure projects, might boost construction.
In addition, shorn of fundamentals, there is a statistical reason for expecting higher growth in the last two quarters. The first two quarters of FY09 had had relatively high growths, at 7.8 and 7.7 percent, before falling to 5.8 percent in the last two quarters.
Ceteris Paribus, this should boost Q3 and Q4 growth numbers this fiscal year. The net outcome of these mutually reinforcing drivers is that a sense of weakness if likely to persist for time.
The implications for policy are evident. If the RBI were to subscribe to our rather bearish view of the continuing weakness of economic activity, then there is a good chance that it will desist from tightening its policy stance for the better part of the year.
?The author is vice-president, business & economic research, Axis Bank. These are his personal views