Recovery may take longer

Lower food production and slower spending likely to drag GDP growth below five per cent in Q3

The Indian economy is a study in contrasts, as fundamentals and sentiment occasionally move in different directions. Since August 2012, benchmark equity indices have risen 11.5 per cent, even as the macro-economic indicators continue to flash red. There’s no denying the government’s reforms push is welcome, but these measures have not helped improve either the investment climate or industrial output. Growth continues to slow, inflation remains largely sticky and industrial output continues to decline (minus 0.6 in December and minus 0.8 per cent in January). Despite the government’s attempts to revive sentiments of corporate India, industrial production is expected to remain weak or below trend in the coming months.

So, what is the macro-economic data pointing? Data coming out in recent times suggest the situation might not improve before 2014. Nomura’s India economist, Sonal Varma, believes that since the macro-economic conditions have not changed much since last year, the bottoming out of the economy could be prolonged. There is no clear sign of any recovery, either in India or globally. Though most economists are working on growth projections for the October-December quarter, it is largely believed that given the weakness in industrial output and slowing consumption, growth could well dip below five per cent.

Deutsche Bank chief economist Taimur Baig, along with Kaushik Das, in a note, says: “Our growth estimate exercise suggests a real GDP (gross domestic product) growth of 4.8 per cent year-on-year (y-o-y). This would mark a sharp slowdown from the already weak growth trajectory in the past several quarters.” Deutsche Bank expects the industrial sector to log growth of 2.8 per cent y-o-y in the third quarter, compared to 1.2 per cent y-o-y growth seen in the second quarter of FY13. The construction sector too, is expected to log growth of seven per cent compared to the corresponding quarter in the previous year. Trade, transport and communication, which account for nearly 30 per cent of the overall economy, are expected to weaken both sequentially and annually to five per cent. And, given the poor kharif crop, agriculture is also expected to grow by only one per cent y-o-y, with higher downside risks.

Though the government has taken several steps in the right direction, the risks to growth continue. Though the wholesale price index (WPI) print for January was at 6.6 per cent y-o-y, the battle against inflation is far from won. The recent rise in crude oil prices, uptick in consumer price index and a partial pass-through of the increase in diesel, coal and electricity price revisions can pose fresh risks to inflation. Nomura’s Varma expects the fall in WPI to be reversed when coal price revision kicks in. This would restrict any further monetary easing through 2013, keeping investment sentiment subdued.