Q1 GDP estimates ahead of consensus

But it?s nothing to cheer about as slowdown is secular and next two quarters may be worse

From agriculture to services, every section of the Indian economy is slowing. Though the gross domestic product (GDP) in the first quarter of FY13 has expanded by 5.5 per cent, which is ahead of consensus estimates of 5.2 per cent, not many are cheering. The farm sector has grown by 2.9 per cent, while industry’s growth has collapsed to 0.8 per cent. The slowdown has also hit services, which has grown by 7.4 per cent in the quarter.

According to IDBI Bank Global Research, agriculture, industry and services marked a sequential decline of 11.1 per cent, six per cent and 5.5 per cent, respectively. While industry and services slowdown was expected, the slowdown in the agriculture sector has surprised because the rabi crop was good. The farm sector’s growth may decline further because of a deficient monsoon.

As is always the case with most data, the first quarter numbers also have thrown up some surprises. While the deceleration in the overall economy is apparent across all industry groups, the construction sector has seen a sharp year-on-year growth of 10.9 per cent in the June quarter, which is a five-year high. This has also driven demand for steel and cement. According to the Central Statistics Office, production of cement increased by 11 per cent and consumption grew by 8.8 per cent in the quarter. Economists find this number a little puzzling because the overall industrial production data shows that Indian factories are producing less and the metals sector has been hit considerably. Says Barclays, “To us, this jump appears a bit out of place from the overall economic situation, and even the rise in lead indicators did not suggest such a large move up. We believe there is a risk this figure may get revised lower in coming months.”

What is worrying is that some of the most resilient segments of the economy, retail and wholesale trade, transport and communication have grown by a rather modest four per cent Y-o-Y. Economists believe that this slowdown could be exaggerated and may see an upward revision. On the expenditure side, the GDP figures show that consumption is coming off, falling to four per cent YoY compared to 6.1 per cent in Q4FY12. Given that consumption accounts for over 60 per cent of the economy, a slowdown in private consumption indicates that the pressures have not eased.

The investment cycle too remains weak as gross fixed capital formation has risen by 0.7 per cent only, after a 3.6 per cent YoY print in the previous quarter. Barclays does not expect investment growth to improve much in the next six months. While the next two quarters are likely to be worse, a lot will depend on how soon the RBI gets lending rates down, Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, says: “Growth and investment cycle will not revive if rates are high. With growth slowing to below six per cent levels, interest rates cannot remain high.” Clearly, the ball is back in RBI’s court.