Economy expected to grow below 4.9% in FY14

Recovery unlikely before Q3 of FY15 as slowdown continues to deepen

Though Finance Minister P Chidambaram believes economic growth is reviving, the third quarter gross domestic product numbers suggest otherwise. The economy expanded at 4.7 per cent in the December quarter of 2013-14. If growth had hit a decade low of five per cent in FY13, things appear to have worsened in the current financial year. In the first nine months of the year, economic growth has averaged 4.6 per cent, which puts at risk the 4.9 per cent advance estimates of  the government.

The government may have to downgrade its full-year estimates from 4.9 per cent. Tirthankar Patnaik at Religare Capital Markets believes the advance estimates of 4.9 per cent face a downward risk. The economy is expected to grow below five per cent for another three quarters, before it picks up marginally.

The third quarter data suggest the economy is in the midst of a slowdown. Sequentially, everything has slowed, though there is some improvement annually. Agriculture growth has declined to 3.6 per cent from 4.6 per cent in the second quarter, while mining has contracted by 1.6 per cent, against a 0.4 per cent decline in the second quarter. The decline in mining was largely expected to have been over and this quarter was expected to have seen some revival but that has not happened. The contraction in manufacturing has also deepened, as the segment has declined 1.9 per cent in Q3, compared to one per cent growth in the second quarter.

Going by the contraction in manufacturing, economists are also expecting services growth to be revised downwards in the full-year estimates to be released in May this year. Services has grown 7.6 per cent, largely driven by the 12.5 per cent growth in financing, insurance, real estate and business services. If manufacturing has contracted sharply, it would be difficult for services to post such a growth.

While the economy seems to have hit bottom, a revival is not in sight. The only upside to this weak growth is its impact on inflation. Economists expect economic growth to stay below five per cent till the third quarter of FY15. There could be some recovery after that.