beyondbrics

Economists and farmers alike can be grateful for India’s better winter harvests, which helped the country’s Q2 GDP figure to match the consensus – at 8.8 per cent growth year-on-year.

But with some confusing domestic demand data, analysts aren’t sure whether to start tinkering with their growth forecasts.

Agricultural output was a major factor in the strong GDP figure, rising 2.8 per cent y-o-y thanks to improved harvests. That, coupled with improved service sector growth, should be a signal of strong domestic demand.

But Q2 data showed “dismal” domestic demand components, according to Nomura:

Private consumption slumped to 0.3% y-o-y in Q2 from 2.6% in Q1, fixed investment has dropped to 3.7% from 17.7%, government consumption growth was negative and both export and import growth contracted. The demand side, therefore, paints a completely different and a much weaker picture than the robust outlook presented by the supply side.

Even economists aren’t sure what to make of it (also from Nomura).

In our view, domestic demand may have started moderating, but it is surely not as weak as suggested by the demand-side GDP components. Indeed, other real activity indicators on auto sales, capital goods output, machinery equipment production and government expenditure all suggest strong domestic demand. The data may be revised higher at a later stage, but the current readings are puzzling.

Overall Capital Economics seems satisfied with the data:

Q2 GDP data published today were strong relative to a year ago but suggest that momentum slowed sharply in q/q annualised terms. We had expected the recent weakness but do not think that it will last. Domestic private sector spending will probably ensure that the economy will expand rapidly in coming quarters even as stimulatory policies are withdrawn and global growth slows…

What’s more, RBI monetary policy tightening still has far to go before it weighs on growth. The upshot is that we still expect GDP to rise 9.0-9.5% in FY10-11 (April-March) which implies that growth will accelerate in coming quarters. Admittedly, the risks to our view are to the downside but we remain happy to be more bullish than the consensus or even official government forecasts.

While CE sees accelerating growth, Nomura thinks the economy may have topped out.

Looking ahead, we see downside risks to our GDP forecast of 9% y-o-y in FY11. Nomura’s composite leading index (CLI), which has a lead of two quarters on non-agriculture GDP growth, is pointing to a slowdown. While this should be partly offset by higher growth in agricultural output, recent data on exports and industrial output are already pointing to a tempering of growth momentum and the base effects will become less favorable.

Overall, June may mark the peak quarterly GDP growth in FY11. We are currently reviewing our estimates with a mind to downgrade.

Still, with some economists expecting Chinese growth to moderate to around 8 per cent next year, India still looks on course to overtake.

Related:
Can India’s growth outpace China’s? beyondbrics
India’s tortoise must turn on the speed, FT