Q1FY13 GDP - HO, HUM... SNOOZE....ZZZZZ!
By Ruma Dubey
It’s a complete non-event. With Q1FY13 GDP coming at 5.5% the market simply shrugged it off and moved on, shifting its focus to Jackson Hole. This 5.5% number puts things right where they were, not giving RBI much to work on. Thus RBI will also remain status quo, continue sitting on its hand as this current number does not really warrant any action.
Two factors contributed to the GDP – the surge in construction and farm output. Both seem to be one-off events and looking ahead, Q2 might look tough. But then again, the base effect will kick in and YoY, the numbers, will end up looking good. Construction being up at 10.9% v/s 3.5% on a YoY comes as no surprise as June was relatively dry due to late monsoon and thus seeing a big uptake on this sector is obvious. This is probably just a one-off. Farm output at 2.9% is not too bad but with monsoon delaying, we could see a fall in Q2. Though IMD has stated that monsoon situation is better than what it was at the beginning of the season but the worst case scenario could be that kharif crop could be affected but not the winter crop. Agriculture share in Q3 is around 20%, up from 14% in first half and thus Q3 farm output growth depends largely on the monsoon and we have to wait and watch how the delayed monsoon has affected the kharif crops.
The fact to ponder about is the falling service sector growth which came in at 6.9%. Trade, hotels, transport and communication has fallen from 13.8% to 4%. Financing, insurance, real estate & business services fell rose from 9.4% to 10.8%. The service sector, since Q2FY12 has been declining and that is something which needs attention. The big indicator is that consumption is going down and this is the effect of Govt inaction kicking in. Service sector is one of the biggest pillar of India’s growth story and a fall in this sector is worrying.
Investment deceleration is worrying. In Q4, gross fixed capital formation was up 5.5% on a YoY but in current Q1, it has grown only 0.6% at Rs.4.5 lakh crore. Private final consumption expenditure has grown in current Q1 by 3.9% on a YoY. Though composition of growth is worrying, high fiscal deifict is boosting consumption but crowding out investment, and unless we see revival in investments, we cannot expect growth to go ahead much from here. Unless action happens from the Govt side, we do not see too much light at the end of this tunnel with the monsoon session also looking like a complete washout.
The govt needs to introspect, read these figures carefully and give thought – it needs to get into action or else, the Indian economy could fall into the abyss. The Govt needs to take steps to stimulate growth and if the Govt continues to announce only pro-poor policies to catch the vote bank, it might miss out on the bigger picture. Incidentally, the pro-poor policies are not too working too well, infact the gap between the haves and the have not’s has only widened. Govt needs to focus on supply side issues.
How do we get corporate confidence up? That has to be the biggest question and not whether or not RBI will reduce rate. RBI has been doing its job very well, with absolute diligence but the laggard causing this failure is obviously the Govt.
Very real supply constraints have developed like in infra, mainly land acquisitions which does not require big bang reforms. The fall in manufacturing is alarming and this is a direct consequence of the fall in investments and many projects getting stalled. The CMIE report which stated that over Rs.5 lakh crore worth investments currently stands stalled or cancelled comes all the more into perspective.
Estimates for Brazil growth is revised downwards, China is also not looking too encouraging now. Europe is a mess and USA data is not exactly encouraging. Global macro factors have been so bad. But blaming it all only on the global factors would be foolish. The Govt needs to wake up and realize that we have major domestic issues and if these are not addressed as soon as possible, along with global factors, the issues could manifest into a long protracted period of pain.
The next release of quarterly GDP estimate for the quarter July- Sept 2012 (Q2 of 2012-13) will be on 30.11.2012. IIP numbers for July will be released on 12th Sept.