>India: Q3 GDP for FY2012 growth decelerates sharply reflecting increased weakness

 The Indian economy is on the brink of registering one of the slowest episodes of growth since the Lehman crisis struck in FY2009. Third quarter GDP for FY2012 witnessed a steep decline and printed 6.1% YoY


The Indian economy is on the brink of registering one of the slowest episodes of growth since the Lehman crisis struck in FY2009. Third quarter GDP for FY2012 witnessed a steep decline and printed 6.1% YoY. While a slowdown as compared to the previous quarter was expected but the quantum of the drop was unexpected.


The below than trend outturn in agriculture was surprising as the year has witnessed high grain procurement levels and crop output has also been robust. The sharp drop is primarily attributable to adverse base effect as last year’s Q3 number has been revised upward significantly. However, on the whole growth prospects remain a victim of a conjunction of domestic and external factors, which will continue to take a toll for some time before we see any substantial improvement towards the latter half of next fiscal.


SECTORAL PERFORMANCE
Manufacturing has not yet ventured into negative territory but its growth has become stagnant and it clocked a marginal 0.4% YoY in Q3. This is the lowest print witnessed for this particular GDP series till date


Services growth is showing signs of slowing and posted 8.9% YoY for Q3.


This slowdown is on expected lines as most of the leading indicators such as cellular connections, cargo traffic, vehicle sales both commercial and passenger are showing a sharp decline in growth as compared to last year




There are strong interlinkages between growth in industry and services. However, it must be noted that in the event of a severe downturn, the services sector tends to be more resilient than industry as is evidenced by the fact that during the last crisis in FY2009 where overall growth declined to 6.8% YoY, industry slumped to 4.5% YoY but services more or less held its own with an average growth of 10% YoY. This is a heartening fact as the latter comprises the lion’s share of our GDP and is likely to cushion our bumpy ride ahead somewhat.


• In Q3 FY2012, mining decelerated by 3.1% YoY as compared to –2.9% YoY previously. The impact of the mining ban is being felt sharply now but is more a governance related problem, which is likely to be corrected by next fiscal.


• Manufacturing has not yet ventured into negative territory but its growth has become stagnant and it clocked a marginal 0.4% YoY in Q3. This is the lowest print witnessed for this particular GDP series till date.


• There is considerable slack in the industrial sector and capacity expansion plans have been broadly postponed in the face of growing input costs, higher borrowing rates and existing spare capacity. The global uncertainty has also exacerbated the bleak investor sentiment.


• Capacity utilization levels for most industries especially the core sectors are also quite low.




• Policy action is trying to address this situation but some time will elapse before it can transmit into the economy and bear fruit.


• On the other hand, the remaining components of industry, viz. construction and electricity have held up pretty well and continue to register encouraging growth. Electricity, gas & water supply grew by 9% YoY
whereas construction posted a sharp increase to 7.2% YoY as compared to 4.3% YoY previously.

Considerable slack continues to remain in the industrial sector

• Services growth is showing signs of slowing and posted 8.9% YoY for Q3 mostly on account of a dip in trade, hotels, transport and communications.


• This slowdown is on expected lines as most of the leading indicators such as cellular connections, cargo traffic, vehicle sales both commercial and passenger are showing a sharp decline in growth as compared to last year.


• Financing, insurance and real estate is also showing slightly lower than average growth due to a decline in credit growth numbers as economic activity has dipped over the past few quarters.


Expenditure breakup


The encouraging aspect of this classification is that private consumption is already showing signs of recovery despite the adverse impediments in the form of high inflation and elevated interest rates. Consumption notched 6.2% YoY in Q3 as against 2.9% YoY previously.


On the aggregate demand side, GDP clocked 6.3% YoY as against 6.7% YoY in the previous quarter.
• The encouraging aspect of this classification is that private consumption is already showing signs of recovery despite the adverse impediments in the form of high inflation and elevated interest rates. Consumption notched 6.2% YoY in Q3 as against 2.9% YoY previously.


• The interest rate sensitive sectors such as automobiles are showing signs of slowdown but the consumption basket primarily comprises of elements, which are inelastic in nature such as food, fuel and housing.


• The consumer non-durables sector in IIP is also reflecting this trend and has shown a sharp increase over the past few months.


• Gross fixed capital formation predictably remains moribund and registered –1.2% YoY as compared to –4% YoY in the previous quarter. These declines have been sharper than that witnessed during FY2009, presumably on account of the fact that there are additional domestic sector worries as well.


• On the external front, imports growth has gathered momentum and stands at 17.3% YoY as against 6.9% YoY previously. Exports growth has come down sharply to 13.1% YoY from the previous 23.3% YoY mostly due to the significant revisions in the export data over the past year.


GFCF performance over the year so far remains the weakest on record

India on the brink of a sharp slowdown


The Indian economy is staring at a significant growth moderation over this fiscal year and attainment of a close to 7% YoY growth looks to be a challenge unless the last quarter growth executes a strong rebound


The Indian economy is staring at a significant growth moderation over this fiscal year and attainment of a close to 7% YoY growth looks to be a challenge unless the last quarter growth executes a strong rebound. The investment cycle is also impaired for the time being and will take some time to pick up again.


We would expect industry growth to remain in the doldrums for a while and since services is interlinked, the trade, hotels component will also witness some slowdown. Commensurately slower credit growth will also weigh on growth. However, government spending continues to remain fairly stable and will moderate the slowdown but must also be treated circumspectly as it has also benefited from positive base effect.


On the global front, the Eurozone seems to have postponed their troubles for a while and the US does not seem to be in any imminent danger of a substantial growth slowdown. This will work slightly in our favour as far as our exports are concerned and will ensure that we do not take too much hit on the growth front going ahead. We would expect a slight improvement in our GDP numbers for the next fiscal.


On the policy front, we feel the RBI will reduce CRR by 50 bps at its next policy meeting before resorting to rate cuts.


RISH TRADER