The recently released second quarter GDP number for India pertaining to the current financial year (i.e 2009-10) has been a clear surprise on the upside. A YoY growth of 7.87% takes the first half GDP growth to about 7%. This calls for an upward revision of my annual growth forecast. However, I am hesitant to do so before I see the Q3 GDP numbers. But, more of that later. First, The analysis.
As mentioned earlier, the recorded growth is a big surprise and the market reacted very positively to the news. While the growth of the industry at 9.21% was on the expected line, the growth of services at close to 9% was a surprise. Construction growth of about 6.5% was definitely above expectation given the high base effect. What is also surprising is that the segment ‘Financing, Insurance, Real Estate & Business Services’ showed a robust growth (about 7.7%). I was expecting a slower growth especially in light of faltering credit offtake scenario. The other surprise was a minor positive growth recorded by agriculture, which I expected to show a marginally negative growth. On the positive side, there has been some minor rebound in the GFCF (Gross Fixed Capital Formation) number. Although at 7.33%, it is lower than the average. However, what carried the day (as has been happening for the last few quarters) was the positive effect of the government stimulus package, especially aimed at rural and social sector. The GFCE (Government Fixed Consumption Expenditure) increased by as much as 26.91%. Not surprisingly, ‘Community, Social and Personal Services’ increased by as much as 12.66%, the highest increase amongst the various components of the service sector.
This takes me to my areas of concern. The extent of GDP growth rate is still crucially dependent on government consumption. While there has been some increase in the growth rate of PFCE (Private Final Consumption Expenditure) or domestic demand (5.63%), it still needs to grow faster and be more stable at the higher rate. So far, that has not been the case. As has been mentioned by me earlier, the lack of domestic demand is clearly evident from the financial performance of the Indian corporates during quarter ending September’09. While the growth in their bottomline has been quite robust (above 20%), the topline (sales revenue) hardly moved. On the other hand, if one factors in the effect on inflation on sales revenue, the volume growth will not be impressive at all. This clearly indicates lackluster demand. Also, the recent increase in domestic demand has a lot to do with the effect of the festival period, apart from the lingering effect of 6th pay commission payouts. This is also reflected in increased industrial activity.
Whether I would need to change my expectation of GDP growth for the full year would depend on how the Q3 data pans out. The existing data of the first half of the year cannot be extrapolated to arrive at the growth for the entire year. The next two quarters would see the real effect of poor monsoon and I expect the contribution of the agriculture sector to be negative during this period. Domestic demand might peter out again, if the faltering credit flow is any indication and also given that the festival period is behind us.
The other big unknown is how the global scenario pans out. I am amongst the pessimistic camp in this regard.
Hence, the crucial component with regard to the sustainability of high growth would be the role played by the government. If it continues to remain extravagant despite the rising fiscal concern, the growth might be stable, though at the cost of future growth. If the government looks forward to implementing the exit strategy during this fiscal, the growth will be impacted. The other crucial aspect would be how soon the RBI starts tightening the interest rates. The interest rates have already bottomed out. If it starts moving north in reaction to rising inflation, growth will be hit.
I also have a feeling that the initial growth estimates for Q2’10 might be revised downward, especially given some factors explained earlier.
As of now, I stick to my expected growth band of 5.8 to 6% for the full year.
As mentioned earlier, the recorded growth is a big surprise and the market reacted very positively to the news. While the growth of the industry at 9.21% was on the expected line, the growth of services at close to 9% was a surprise. Construction growth of about 6.5% was definitely above expectation given the high base effect. What is also surprising is that the segment ‘Financing, Insurance, Real Estate & Business Services’ showed a robust growth (about 7.7%). I was expecting a slower growth especially in light of faltering credit offtake scenario. The other surprise was a minor positive growth recorded by agriculture, which I expected to show a marginally negative growth. On the positive side, there has been some minor rebound in the GFCF (Gross Fixed Capital Formation) number. Although at 7.33%, it is lower than the average. However, what carried the day (as has been happening for the last few quarters) was the positive effect of the government stimulus package, especially aimed at rural and social sector. The GFCE (Government Fixed Consumption Expenditure) increased by as much as 26.91%. Not surprisingly, ‘Community, Social and Personal Services’ increased by as much as 12.66%, the highest increase amongst the various components of the service sector.
This takes me to my areas of concern. The extent of GDP growth rate is still crucially dependent on government consumption. While there has been some increase in the growth rate of PFCE (Private Final Consumption Expenditure) or domestic demand (5.63%), it still needs to grow faster and be more stable at the higher rate. So far, that has not been the case. As has been mentioned by me earlier, the lack of domestic demand is clearly evident from the financial performance of the Indian corporates during quarter ending September’09. While the growth in their bottomline has been quite robust (above 20%), the topline (sales revenue) hardly moved. On the other hand, if one factors in the effect on inflation on sales revenue, the volume growth will not be impressive at all. This clearly indicates lackluster demand. Also, the recent increase in domestic demand has a lot to do with the effect of the festival period, apart from the lingering effect of 6th pay commission payouts. This is also reflected in increased industrial activity.
Whether I would need to change my expectation of GDP growth for the full year would depend on how the Q3 data pans out. The existing data of the first half of the year cannot be extrapolated to arrive at the growth for the entire year. The next two quarters would see the real effect of poor monsoon and I expect the contribution of the agriculture sector to be negative during this period. Domestic demand might peter out again, if the faltering credit flow is any indication and also given that the festival period is behind us.
The other big unknown is how the global scenario pans out. I am amongst the pessimistic camp in this regard.
Hence, the crucial component with regard to the sustainability of high growth would be the role played by the government. If it continues to remain extravagant despite the rising fiscal concern, the growth might be stable, though at the cost of future growth. If the government looks forward to implementing the exit strategy during this fiscal, the growth will be impacted. The other crucial aspect would be how soon the RBI starts tightening the interest rates. The interest rates have already bottomed out. If it starts moving north in reaction to rising inflation, growth will be hit.
I also have a feeling that the initial growth estimates for Q2’10 might be revised downward, especially given some factors explained earlier.
As of now, I stick to my expected growth band of 5.8 to 6% for the full year.
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