Q1 GDP growth shows resilience

The sub-8% growth should be seen in the context of global and domestic headwinds.

The stock market may have discounted the 7.7 per cent growth in real GDP in the first quarter of FY12, but economists believe the number needs to be viewed in the context of several domestic and global headwinds the economy has been facing. Given that GDP growth has been slowing sequentially for the last four quarters, this quarter was also expected to clock below-trend growth. However, 7.7 per cent growth in Q1FY12 compared to 7.8 per cent in Q4FY11 only shows the resilience of the Indian economy. While sub-eight per cent growth is now in line with expectations, it is not particularly weak.

However, on the downside, since the GDP estimates were compiled using the new Index of Industrial Production (IIP) series, the unavailability of revised back-data makes a clean interpretation of today’s GDP report almost impossible, believes Mole Hau of BNP Paribas. This is what makes the first quarter numbers a mixed bag. Other leading indicators like domestic vehicle sales figures and PMI surveys seem to suggest the domestic demand destruction is an ongoing process. However, with inflation yet to come down meaningfully, the rate cycle is not ready to start coming off. So, economists don’t rule out another rise before the calendar year is over.

Even as there were concerns that prevailing high inflation and interest rates would dampen economic activities, the evidence, so far, has been mixed. In fact, year-on-year non-farm sector growth accelerated from 7.8 per cent in the fourth quarter of FY11 to 8.4 per cent in Q1FY12. This was supported by improvement in industrial and services sector activity.

Growth in agriculture production, too, has been in line with expectations, but slower than that of recent quarters. Kaushik Das, India Economist at Deutsche Bank AG, says, “No doubt, growth has slipped below the trend rate of eight per cent, but this slowdown is not a cause for panic. Despite inflationary pressures, rising interest rates and a high base effect, growth has not collapsed. Our house view is that Europe and US will not fall into an ouright recession, which should help the Indian economy achieve a growth rate of around eight per cent in FY12.”

The other heartening thing about this quarter’s GDP figures is the investment cycle, which is seemingly reviving. Contrary to conventional wisdom, investment has jumped 7.9 per cent y-o-y compared to 0.4 per cent growth in the previous quarter. This has contributed 2.5 percentage points to GDP growth. If the trend holds, the downside risks to GDP may somewhat dissipate.