India's GDP growth is more realistic in Dec 09 quarter

India’s GDP grew 6% in 3QFY10, following strong growth of 7.9% in 2QFY10. The number was substantially lower than consensus’ estimates (6.8%). The major surprise came from social and personal services, which declined -2.2% in 3QFY10. If you look at he numbers more closely, you will find that this growth number (6%) is actually better than the previous quarter growth of 7.9%. You must be wondering that this guy has lost it completely. Well, I will just say let the numbers speak to you. Here is the table.

The growth rate of 6% in 3QFY10 seems to be more close to reality than last quarter’s growth rate, which was inflated by government consumption. In 3QFY10, government consumption declined 10.3%, following an increase of 26.9% in 2QFY10. Excluding government consumption, GDP (at constant market prices) grew impressively by 8.5%, as against 4.8% in 2QFY10. That is why I was saying that this quarter growth is better than that of the previous one.

Well this is not it. There are some more interesting points to come. Industry which has 28% weight in the overall GDP, witnessed a strong rebound in 3QFY10. It grew by 11.6%, way ahead of the 7.5% growth average recorded in the past decade. Manufacturing grew a whopping 14.3%, the highest growth in more than a decade.

On the down side, services, having a weight of 56% in the GDP, recorded a decade low growth of 6.3%, dragging down economic growth. Another problem for the economy is its low investment growth. Real investment grew at a tepid rate of 5.1% in 3QFY10. Investment growth continues to be sluggish with a meager 2.4% average growth in the last seven quarters. The investment cycle, however, seems to have bottomed out. Nevertheless, we do not expect a strong recovery in investment before FY12.

The Economic Survey FY10 estimates FY11 GDP growth at 8.2%, which seems quite optimistic. Until India witness a strong recovery in the investment cycle, which was the main driver of growth during FY04-FY08, returning to the 9% kind of growth levels seems unrealistic. Investment growth was around 18% during the FY04-08 period. Furthermore, fourth quarter GDP numbers from many developed economies indicate the fragility of the much-talked-about global recovery.