As growth for Q1 races past estimates, experts question if it will sustain

With growth for the April-June quarter (Q1) of 2018-19 (FY19) racing past estimates of economists and experts to register the highest rate in nine quarters, they questioned if this momentum could be sustained for the rest of the year.

“Can this momentum be sustained? We have doubts about it, given both global and domestic headwinds. Our leading indicators are also pointing to a slowdown ahead,” said Sonal Varma of Nomura.

She added, “Higher oil prices and tighter global financial conditions could be external headwinds. Our view is the global economy is set to cyclically slow. We also expect the government to cut capital expenditure, given budget constraints. Investment decisions may be delayed because of political uncertainty ahead of elections (in 2019),” Varma said, adding that GDP growth will slow to an average of 7.2 per cent towards the end of 2018. Experts are of the opinion that the two sectors — manufacturing and agriculture — that aided GDP growth in Q1FY19 might slow in quarters ahead. One reason attributed for their high growth is the low base effect. 

Shubhada Rao, chief economist, YES Bank, said she would stick to her earlier forecast of 7.3 per cent growth for FY19. “In terms of quarterly trajectory, we believe GDP growth has peaked in the first quarter. Recent global volatility could have a dampening effect on growth,” Rao said. 

Her peers agreed, with some pointing at how oil prices and a falling rupee could exert pressure.

Rashesh Shah, president, Federation of Indian Chambers of Commerce and Industry, said, “Growth numbers are quite robust. Industry, however, is under some pressure because of volatile oil prices and a falling rupee.”  

Almost all economists ruled out any further rate hike by the Reserve Bank of India’s Monetary Policy Committee.

“This is probably the best GDP trend we have seen in the first half of the fiscal year,” said Shashank Mendiratta, India economist at ANZ Bank. “We expect the RBI to hike rates in the March quarter next year with no changes this year.”

Nomura said the GDP data should not affect monetary policy. The data was lagged while rate hikes were frontloaded.“From a growth-inflation standpoint, we don’t see a reason for the RBI to hike rates any further. Recent oil prices and the rupee are adding to input cost pressures, but a slower-than-expected build-up in food prices should offset these,” Nomura’s Varma said.