Glass half full

Most analysts say the Indian economy is bottoming out

The lower-than-expected gross domestic product (GDP) growth estimates for FY13 by the Central Statistical Organisation (CSO) is a glass half full for the market. While on the one hand it signals the economic slowdown is more pronounced and widespread than expected, on the other it means economic growth has probably bottomed out and the beginning of recovery can be expected next financial year. The shocker from CSO also raises the prospects for lower headline inflation and monetary easing by the central bank, both good news for equity investors who bet on the future and discount the past. This would explain the stock market’s muted response to the CSO estimates.

The optimism is based on actual GDP growth in the first half of FY13 and the growth estimates for next financial year. The economy grew 5.4 per cent during April-September 2012 and is expected to expand 6-6.5 per cent next year, according to various estimates. For the CSO estimate to be true, economic growth is likely to be around 4.5 per cent during the second half. This hints at a U-shaped recovery, beginning FY14. “There’s nothing new in the CSO estimates that warrants a downward revision in our growth estimates for FY14. The economy is bottoming out; there will be a recovery,” says Sujan Hajra, chief economist, Anand Rathi Financial Services.

He also questions the CSO estimates and expects a positive surprise when the actual numbers come out later this year. “For CSO numbers to match, the growth in construction and business & personal services during the second half of F13 should be a fraction of the growth witnessed in the first half. This doesn’t sound plausible, given the on-ground activity,” says Hajra. He expects the economy to expand 5.5 per cent this year.

Madan Sabnavis, chief economist of CARE Ratings, says CSO has been conservative. “The numbers for the services sector are shockingly low but is in line with a slowdown in economic activity visible on ground,” he says. Some are, however, not so hopeful. The CSO estimates, they say, confirm their worst fears about the economy. “The estimates have just confirmed what other lead indicators such as automobile sales, exports and banking statistics were pointing towards. The investment cycle has come to half and consumption demand is decelerating,” says Raju Bhinge, chief executive, Tata Strategic Management Group. He sees a sub-five per cent growth for many quarters, unless some dramatic steps are announced in the coming Union Budget.