Few GDP upgrades for FY15, despite Q1 show

Recovery in growth can sustain at current levels only if services and investments pick up

India's economic growth expanded by 5.7 per cent in the June quarter, taking the Street by surprise, as consensus estimates pegged it at 5.5 per cent. Consensus is that FY14 saw India's economic growth hit rock bottom and the first quarter numbers hold promise. While the market believes there are upside risks, few are rushing to upgrade the full year's growth estimates. The headline number may have shown strength but the details show signs of weakness.

The pace of growth in the June quarter might not be sustainable as it was led by higher government spending and not a turn in the business cycle. There's no denying that growth in exports and industrial production has contributed to the headline number, but a revival in private services would indicate a genuine economic turnaround. The uptick in growth during the first quarter of FY15 has been driven by a sharp jump in community, social and personal services (up 9.1 per cent year-on-year), a proxy for government spending. After pulling back government expenditure in the fourth quarter (March quarter) of FY14, government spending saw a revival in the new financial year.

However, given the need to keep a tight control on the fiscal deficit, government spending may not continue in coming quarters. "Had social services grown at, say, six per cent in the two quarters (March and June quarters), growth would have worked out to a more comparable 5.3 per cent for June and 4.9 per cent for March," says Bank of America Merrill Lynch.

Though industry growth recovered and grew by 4.2 per cent after contracting in the previous two quarters, private services growth (trade, transport, communications and hotels) decelerated to the lowest level in five quarters. For growth sustain at these levels, private services need to recover.

On the brighter side, the June quarter has also seen gross fixed investment grow by seven per cent, a 10-quarter high. While expenditure side data tends to see revisions, JPMorgan's Sajjid Chinoy terms it as a tantalising sign of capex recovery. If this were to continue, the market would have greater confidence in June quarter's pace sustaining through the year. However, for this to happen, interest rate cuts need to come down meaningfully. The market will hold its horses, till either of these things happen.