Services hold the key to GDP numbers for Q4 2012-13

With recovery in industrial growth remaining elusive, policy makers' hope for a turnaround in the fourth quarter of 2012-13 now all depends on the largest sector of the Indian economy - services.

It is all hoped, even by the most optimists, that economic recovery will be a gradual process. But, even that gradual process is not visible, if the index of industrial production (IIP) data are to be relied on.

However, in the first three quarter of FY13, there was no one-to-one correlation with IIP growth and economic expansion. When IIP growth stood the highest at 2.11 per cent in the third quarter, economic growth plunged to a four-year low of 4.5 per cent.

This was so because the services sector, including construction, with a share of around 60 per cent in the GDP, posted the lowest growth in the three quarters at 6.02 per cent.

IIP growth in the third quarter mainly came in October, with industrial output expanding 8.4 per cent. It is a trend that IIP grows faster in a pre-Diwali month due to enhanced activities. However, the other two months of the quarter showed negative growth at (-)1 per cent and (-)0.5 per cent in November and December, respectively. In the first quarter of FY13, when IIP grew dismally by 0.58 per cent, economic growth stood at 5.5 per cent, the highest in any quarter in the financial year (the fourth quarter numbers are set to come on May 31). Services grew 7.43 per cent in that quarter.

In the second quarter, IIP grew by 0.40 per cent and economic growth also came down to 5.3 per cent. That time, services expanded 7.10 per cent.

As such, the fourth quarter growth could be a bit higher to at least deliver slightly more than five per cent growth in 2012-13.

"Low base of fourth quarter 2011-12 would also help the economic growth in Q4 of 2012-13," said an analyst.

The Central Statistics Office has estimated India's growth to be five per cent in FY13. In the first nine months, India's economy grew five per cent. The economy has to grow by 4.73 per cent in the fourth quarter to deliver five per cent growth for the entire 2012-13. Given the fact that the economy expanded by just 5.3 per cent in the fourth quarter of 2011-12, the task does not seem to be uphill.

In the first two months of the fourth quarter, industrial production grew by just 1.47 per cent. However, as can be seen, the economy had grown by 5.5 per cent and 5.3 per cent in the first quarter and the second quarter, respectively, when IIP had grown by just 0.58 and 0.40 per cent. As such, the economy can still grow higher than five per cent in the fourth quarter of 2012-13 to deliver bit more than five per cent growth for 2012-13.

There is not much independent data available on aggregate services sector. However, taking purchasing managers' index (PMI) as a broad indicator, one can see that services sector more or less grew by the same rate in the fourth quarter of 2012-13 as was the case in the corresponding period of the previous financial year. In the fourth quarter of 2012-13, the services sector grew 55.26 points against 55.6 points in the corresponding quarter of FY12. PMI above 50 points indicate expansion.

However, PMI is month-on-month growth, while official India's data is year-on-year expansion.