India's third quarter GDP report will show the economy slowing from the 5.7% second-quarter pace-Moody's Analytics

Slower Growth, No Stumble in Q3

India's economy is experiencing a slow, cyclical upturn, which should be seen in the third quarter GDP figures due out Friday. The economy's growth reached a recent nadir around the middle 2013 but has been steadily improving since then. Downside risk diminished as the government shored up its fiscal position and external account, and GDP growth picked up in the second quarter of 2014. The May election helped lift investor sentiment and business confidence, though it will take a while before this translates into better performance in the real economy.

Following the unexpectedly strong June quarter results, some reversion toward trend around 5% likely marked the third quarter, better than 2013 though still well below India's potential. But high-frequency data have been volatile and distorted, making estimates tentative. The lifting of restrictions on gold imports, for example, exaggerated overall import numbers from July through September. Exports also disappointed as the slowdown in Europe weighed on demand.

Investment will be key to third-quarter performance. Corporate spending spiked in the three months to June and appeared to expand further through September; industrial production of capital goods, which provides a rough guide to business investment, was slower but still positive. The services sector will continue to expand strongly and drive GDP growth on the production side. Our estimate that GDP grew 5.3% y/y in the third quarter is in line with the steady cyclical upswing of recent quarters. Indicators of the week:

Food inflation accelerated to a four-month high of 10.1% y/y in the week ending August 20. Headline inflation, as measured by the wholesale price index, came in at 9.2% in July. The index was last below 9% in November.

Coming up: HSBC-Markit manufacturing and services PMIs for August. Manufacturing is likely to slow slightly from July, while the service sector is expected to hold up better.

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