Indian economy: Growth slowdown or a transitory dip?

Indian economy grew 7.8% in the fourth quarter of FY11 (Apr-Mar), following 8.3% growth in the previous quarter. For full year FY11, GDP grew 8.5% as against 8% during FY10. 

The agriculture sector saw strong growth of 6.6% in QFY11, the highest in last seven years. Ironically, agriculture sector has been a great savor for Indian economic growth in FY11.  Both the major crops (kharif and rabi) have witnessed a bumper production, thanks to a normal monsoon last year. This year also, the monsoon is expected to be normal, increasing the prospects for healthy agriculture production.

Reflecting the impact of the high interest cost, real investment growth decelerated to 2.2% in 4QFY11, the lowest in eight quarters. Moreover, fixed investment grew only 0.4%, down from 7.8% growth in 3QFY11. However, to some extent, a high base is also responsible for the anaemic investment growth figures.

Private consumption growth at 8% in 4QFY11 (8.6% in FY11 versus 7.3% in FY10) continues to be a major driver for FY11 GDP.

Despite ~10% inflation in FY11, private consumption continued to grow at a healthy pace. With softening of inflation in 2HFY12, I expect private consumption to grow at a healthy ~8% pace. Slowdown in investment growth is a concern. However, forward-looking indicators such as acceleration in credit flow to industry (ex infra), sequential improvement in industrial growth and pricing power with manufacturers show likelihood of investment recovery in the second half of FY12. With a normal monsoon and investment recovery in 2H, 8.5% GDP growth looks likely in FY12.

Therefore, according to me, strong private consumption growth, pick in investment and buoyant exports outlook make me believe that the Indian growth story is likely to remain strong and all the long term fundamentals are very much intact.

Is the recent recovery in the global economy sustainable?

The developed economies like the US, Canada, Japan, Germany, France, S. Korea all have managed to pull out of the so called worst recession in seven decades and have posted quite impressive GDP numbers in last two-three quarters. The two countries which are leading the world economic growth namely China and India have also clocked stellar GDP growths in recent quarters. In addition to that, the US labour market has also shown signs of improvement in last two-three months. Data prints from the US housing market have been quite an icing on the cake in the recent months.

But as we all know that much of it is the outcome of extremely easy monetary policy and gigantic fiscal stimuli launched around the world in last one year and a half. Now the key question at this juncture is that once the policy makers start a gradual exit from the monetary and fiscal stimuli, will the growth momentum sustain? Or the global economy will fall flat once the monetary and fiscal support inevitably withdrawn. And the on-going Europe debt-crisis adds further to the uncertainty to the outlook of the global economy.

Government contribution made all the difference: Government spending has been the key factor behind the strong GDP growth witnessed by major economies in the world. Given the fact that fiscal deficit has increased sharply in most economies in the world, the government support to the economy can not sustain for long. And ultimately the governments will have to withdraw their support which is expected to start in 2010. I, therefore, don’t expect 2010 to be a year of robust economic growth. In fact, according to me India’s GDP growth for FY11 is likely to remain lower than that of FY10. Nevertheless, I expect the macro fundamentals of Indian economy to improve significantly in FY11.

Now talking about the sustainability of the growth momentum, the probability of a double dip recession is very low at this juncture. But the global economy is going to take a while to reach the normalcy level and the global economic recovery process is likely to be rather gradual.

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.