Beating forecasts of sub-5% growth in July-September quarter of Financial Year (FY) 2014-15; India’s GDP advanced by 5.3%. Although growth registered by world’s third largest economy is a tad lower in the second quarter as compared to that in the first quarter of the current fiscal; it is much in line with the full-year estimate of 5.5% given by RBI. During the Q2 of FY 2013-14, Indian economy had grown at 5.2%.
 

Are better days ahead for Indian economy?

(Source: CSO, PersonalFN Research)  

Let’s see how economy performed over the July-September quarter.

In the quarter gone by, robust performance of services sectors and better than expected performance of the agriculture helped the economy partially offset for the lacklustre performance of manufacturing industries and mining sectors.
 

Where the growth comes from…

Industry	Weightage in GDP	Q2 Growth rate
Agriculture	10.8%	3.2%
Mining	1.7%	1.9%
manufacturing	14.6%	0.1%
Electricity, water, gas services	2.1%	8.7%
Construction	7.4%	4.6%
Trade, Hotel, Transport, Communication	26.7%	3.8%
Finance, Real Estate, Insurance	22.1%	9.5%
Community and social services	14.6%	9.6%

(Source: CSO, PersonalFN Research)  

Some positive aspect….
 

• Despite of monsoon jitters, agricultural growth at 3.2% appears to be decent enough providing some support to falling GDP growth
   
• Service sectors such as Finance, Real Estate, Insurance and Community and social services which together account for nearly 37% of the overall GDP, grew at a rate in excess of 9.5%.
   

And the negatives…
 

• Private Final Consumption Expenditure (PFCE) which formed almost 60% of the GDP in Q2, 2014-2015, has become stagnant thereabouts
   
• Gross Fixed Capital Formation (GFCF) that accounted for 32.3% of the GDP in the second quarter of 2014-15 looks dull. Unless capex cycle picks delivering high growth may not be possible for India
   
• Manufacturing growth at just 0.1% looks anemic and forms only 14.6% of the GDP
   

Will economic growth bounce back?
Well, the future of Indian economy largely hinges on how some of the important segments of economy do. Manufacturing growth has been subdued and remains a key concern. While healthy growth in services has been making GDP look better than what it could have otherwise been, had services also done poorly just as manufacturing. Having said this, there is a limit to which services can grow in absence of strong performance of other segments of economy. Therefore, PersonalFN believes, for Indian economy to grow at a higher rate, revival in manufacturing and strong performance of agriculture sectors are the prerequisites.

Stagnant PFCE and low GFCF suggest that major driving expenditure forces are still weak. Rapid industrial growth may need capacity additions. High inflation was a major challenge till now, which seems to be moderating these days. On back of dismal industrial growth and falling inflation, all eyes are now on the RBI monetary policy review. There has been strident demand for a rate cut. Many believe that, unless borrowing cost goes down, capex cycle may not gather momentum and as a result industrial growth may remain lacklustre and weak.

Fall in crude oil prices at international markets has been helping India save on oil import bill. As estimated by Nomura, a Japanese financial major, every fall in crude oil worth USD 10 may potentially push India’s GDP growth upward by 0.1 percentage points. Further, it may also cause consumer inflation to subside by 0.2% of GDP and can also help India reduce Current Account Deficit (CAD) by 0.5% of GDP.

Despite of pressure on crude oil prices, Organisation of Petroleum Exporting Countries (OPEC) has refused to cut production. This has sent crude oil prices below USD 70 per barrel, lowest level witnessed over last 5 years. It is now believed that, crude oil may touch USD 60 per barrel. PersonalFN believes, speculating any such price movement is dangerous and should be avoided. If crude oil prices fall further, India may manage to reduce inflation further.

PersonalFN believes, RBI may not lower rates right away. In fact, it might wait for inflation to settle at lower trajectory. It may also closely monitor the performance of the Government on the fiscal deficit front. RBI Governor seems to have remained steadfast with his stand on interest rates and flow of money in the economy. Going by his recent comments it appears that, it is likely that he would hold rates unchanged on December 02, 2014. Dr Raghuram Rajan, the Governor of RBI, is looking beyond just one datum point that is, inflation. True that, inflation has been one of the biggest factors for not lowering rates so far, but that is not the only factor. Dr Rajan has been of the view that, fixing loopholes pertaining to legal matters in the financial system may help in bringing down borrowing cost even without a rate cut. Pointing at unscrupulous practices of a few promoters, the Governor of RBI asked banks to tackle with the problem of Non-Performing Assets (NPAs) more effectively.

What to expect?
Apart from favourable interest rates and lower inflation, industry may look forward for reforms and government initiatives. The Government has been successful in getting through bill amending labour laws. The new norms have attempted to address problems of medium and small-scale industries. It is expected that, with improvements in the labour laws manufacturing growth may get a boost and entrepreneurship would be promoted. Moreover, the Government has cleared more than 230 projects over last 6 months which were stuck for environment clearances. In another development, the Government placed an order for nearly 2,400 rail wagons indicating its thrust on infrastructure development. RBI envisages 5.5% growth for the current fiscal year. On the other hand, International Monetary Fund (IMF) has revised growth of India’s GDP upward by pegging it at 5.6%.

Impact on Markets:

GDP announcement had not much of impact on market movement on its own but investors are awaiting guidance from RBI which is scheduled to announce monetary policy review on December 02, 2014. Therefore markets were choppy with any clear trend.

PersonalFN believes investors would better off if they avoid speculating on macro-economic developments. Your investment decisions should base on your financial goals and personalised asset allocation.

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