The latest economic growth figures for India provide some welcome relief, but the economy is still underperforming. The good news is that after four consecutive quarters of decelerating growth, the pace of annual expansion in real GDP picked up in the April-June quarter (the first quarter of the 2012/13 fiscal year). This improvement was largely led by stellar performance in the agriculture and construction sectors. Real GDP growth (at factor cost) came in at 5.5% in this latest quarter, improving from 5.3% in the previous three months, and it was better than market expectations ranging between 5.0% and 5.2%.
By sector, agriculture output growth rebounded in April-June, rising by 2.9% on an annual basis, up from 1.7% in the previous quarter, supported by strong winter crop harvest. However, given the deficiency in this year’s monsoon rainfall, the sustainability of agriculture sector growth remains questionable, and the summer crop is likely to disappoint. This has consequences beyond just the agriculture sector, as a low supply of food grains will push up food prices. Food price inflation is has been hovering above 10% for the past five months, and with crude oil prices picking up, it is highly unlikely that the Reserve Bank of India (RBI) will opt for monetary easing in the coming months. Indeed, we do not expect the RBI to loosen monetary policy until structural problems are properly addressed and inflation drops to a comfort level.
Industry remains troubled, with the manufacturing and mining sectors performing poorly. Manufacturing production rose at a meager pace of 0.2% in the first quarter of 2012/13, albeit better than 0.3% decline reported in the previous quarter. The sector witnessed a sharp slowdown in 2011 and the continued to be plagued by stringent monetary policy, rising input costs and sluggish external demand.
Mining sector output growth stalled in the April-July quarter, rising by only 0.1% on an annual basis, sharply down from 4.3% growth in the previous quarter. The sector has been the worst performing over the past year, caused by a series of scandals and regulatory troubles, especially with respect to coal production. Given its forward linkages to other sectors, such as power and manufacturing, the revival of industry as a whole depends on an improvement in mining output in the near future.
Construction, meanwhile, reported strong growth of 10.9% in the first quarter of 2012/13, higher than 4.8% in the previous quarter, largely supported by favorable base effects and government’s initiative to improve infrastructure.
The services sector remains a key driver of growth in India’s economy, and it too has shown signs of moderation. Services growth slowed to 6.9% in April-June, down from 7.9% in the previous quarter and the lowest growth rate since January-March 2000. The sector, which accounts for nearly 60% of total GDP, is suffering in part from a slowdown in activity in the trade, hotels, transport and communication subsector, which grew by just 4.0% in April-June, down from 13.8% in the same period last year. Given sluggish exports demand and falling consumer sentiment domestically, the sector is expected to face further headwinds in the near term.
By expenditure, GDP growth slipped to 3.9% in April-June, down from 5.6% in the previous quarter and marking its worst performance since 2009 March. Private consumption, which accounts for about 60% of GDP, rose only by 4.0% in the first quarter, its lowest growth since 2005, highlighting the depressed state of consumer sentiment owing to high inflation and elevated borrowing costs. Gross fixed capital formation (GFCF), the second largest contributor to domestic demand rose by just 0.7% in the first quarter of 2012/13, down from 3.6% in the previous quarter. Exports growth, too, moderated to 10.1% from 18.1%, while imports rose by 7.9% up from 2.0%.
The Indian economy is expected to perform below its potential in the coming few quarters owing to a combination of domestic as well as external factors. Troubles in the Eurozone will continue to drag on the financial sector and on exports earning. On the domestic front, policy paralysis, high inflation, rising input cost, high twin deficit and political turmoil are the major downside risks to growth in the medium term. Given these prevailing economic conditions, Timetric expects GDP growth to hover around 6% in 2012/13 fiscal year.