Q3 GDP growth of 4.5% suggests slowdown not over

Manufacturing growth at 2.5% shows promise, recovery likely to be gradual

Despite the Central Statistical Organisation's projection on growth plummeting to five per cent in FY13, economists were not expecting growth in gross domestic product (GDP) in the third quarter of the year to be as low as 4.5 per cent. In the corresponding quarter of the previous year, GDP growth was six per cent and such a sharp drop was not expected. According to consensus estimates, GDP was to expand by 4.9 per cent in the quarter but it's evident the slowdown has been more severe than expected.

So, what's happening to the economy? For starters, agriculture output has fallen because of a poor monsoon. Agriculture, fishing and forestry grew 1.1 per cent compared to the 4.1 per cent growth seen in the corresponding quarter last year. Sequentially, however, agriculture has stayed stable. The sharp fall in the headline number has been largely driven by the contraction in mining and quarrying, explain economists. The mining ban in several states, following investigations into illegal mining, has been affecting the sector. So, though the segment again came in the positive territory in the first half of the year, it has shown a contraction. This has also had a cascading effect on other sectors that require raw materials such as iron ore, bauxite and coal. The mining and quarrying segment fell 1.4 per cent year-on-year (y-o-y). In the second quarter of the current fiscal, the segment had recorded a y-o-y growth of two per cent. Services growth too, continued to show a secular decline, both sequentially and annually, which is rather worrying.

Industry is the only segment that is showing some sign of recovery. The segment grew 3.7 per cent in Q3, up from 2.8 per cent in the previous quarter. Within industry, manufacturing has shown decent growth after three quarters. After growing at less than one per cent for the last three quarters, it picked up at 2.5 per cent in Q3FY13.

This momentum in manufacturing is also reflected in the monthly PMI numbers. HSBC's India manufacturing PMI regained momentum in February, rising to 54.2 from 53.2 in January helped by a rise in output (56.3 vs. 54 in January) and new orders (56.3 vs. 55.9 in January). According to Leif Eskesen, chief economist for India and Asean at HSBC, "Looking ahead, manufacturing should stage a gradual recovery led by both domestic and external sources. The still moderate pace of growth and the fiscal tightening delivered with the Budget yesterday could encourage the RBI to cut policy rates again at the next monetary policy meeting, assuming that the next inflation reading remains relatively well-behaved."