Real GDP growth moderated to 4.4% y-o-y in Q2 2013 from 4.8% in Q1 2013, below expectations. Agriculture growth rose to 2.7% y-o-y in Q2 from 1.4% in Q1 due to better monsoons, while GDP growth ex-agriculture moderated to 4.6% y-o-y from 5.3% y-o-y. On a seasonally adjusted basis, we estimate that GDP growth slowed to 0.9% q-o-q in Q2 from 1.2% in Q1. First, a sharp pick-up in government spending (10.5% y-o-y in Q2 versus 0.6% in Q1) was the main positive driver of growth this quarter. If not for government spending, GDP growth would have been under 4%. Second, domestic demand is going from bad to worse. GDP at market prices, which better captures demand, grew at a dismal 2.4% y-o-y versus 3.0% in Q1. Private consumption growth slowed sharply to 1.6% y-o-y in Q2 (lowest in recorded history) versus 3.8% in Q1. In our view, both discretionary and non-discretionary consumer demand is declining. Fixed investment contracted 1.2% y-o-y in Q2 on top of negative growth in the corresponding period last year. The slowdown in domestic demand is reflected in weakening imports. As a result, net exports dragged 0.6pp from GDP growth in Q2, less than a 1.2pp drag in Q1. Third, the slowdown in industrial activity – both mining and manufacturing output contracted in Q2 – is reflected in slowing demand for services. While financial services have moderated, the biggest hit has been to the trade, hotels, transport & communication sector, which accounts for 28% of GDP. Growth in this sector slumped to 3.9% y-o-y in Q2, down from 6.2% in Q1, and a far cry from the sustained double-digit growth during its heyday. This sector has been an important employment generator and is closely linked to industrial activity. Looking ahead, good monsoons and a gradual recovery in global demand are positives, but the question is whether they will be able to offset the drag from the ongoing balance of payment (BOP) stress. In our baseline scenario, we expect BOP pressures to continue over the next three to six months, which would have an adverse impact on the economy through multiple channels: cost-push inflation and margin pressures, higher short-term funding costs, asset price volatility and falling confidence, among others. Additionally, with fiscal pressures building, the government will likely be unable to continue its current pace of spending without risking substantial fiscal slippage, implying spending will have to be sliced in the second half of FY14. Hence, the risk of a pro-cyclical fiscal and monetary policy tightening is rising and the downside risks to our growth outlook have materialized with financial conditions tightening much more than anticipated. We are cutting our real GDP growth estimates to 4.2% y-o-y in FY14 from 5.0% earlier. We retain our negative view on India’s macroeconomic outlook for the next three to six months.
Posted on: Mon, 02 Sep 2013 06:18:53 +0000
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