beyondbrics

On Wednesday, India’s government will release the country’s GDP growth rate for the quarter ending in September, and markets are bracing for the inevitable: a growth rate that’s likely to come in below 7 per cent for the first time in over two years.

While those in the West might celebrate so high a number – indeed, complaining about 7 per cent growth is a bit like whining that you couldn’t afford the wood-grain dashboard on your BMW – for a country that was once forecast to enjoy closer to double-digit growth, it confirms a “new normal” for India.

That “new normal”, analysts told beyondbrics, has manifested itself recently in the form of high inflation, a weak rupee, a widening trade deficit, low manufacturing production and a slower growth rate.

A Reuters poll of 22 economists pegged GDP growth for the quarter ending in September between 5.6 per cent and 7.5 per cent, with a median estimate of 6.9 per cent, around the same figure economists told beyondbrics was the market consensus, and the lowest quarterly growth rate India has experienced since the three months ending June 2009.

Economists and analysts told beyondbrics that their estimates fell in the 6.8 per cent to 7.5 per cent range. If the number turns out to be well below 7 per cent, however, Indian markets will be under “tremendous pressure”. Estimates for the year remain between 7 per cent and 7.5 per cent.

“It’s widely anticipated that GDP is most likely to come below 7 per cent, but if it corrects much more sharply – to between 6 and 6.5 per cent – that is not very positive for the market,” Shubhada Rao, chief economist at Yes Bank, told beyondbrics. “It would imply that deceleration has percolated through all the sectors. While industry is no surprise, that would mean that services would have decelerated much more than anticipated.”

Rao said that while services were likely to contract in the coming quarters, as the slowdown in industrial production filters through the wider economy, growth in the sector this quarter should hold up at 9.4 per cent.

Still, one economist at a large local bank who did not wish to be named because his bank does not share internal GDP estimates with the media, told beyondbrics that the market was overly pessimistic about the growth rate. While it is true that industrial production grew at an anemic 1.9 per cent in September, industrial figures only make up 18 or 19 per cent of total GDP.

Instead, the person said, he expected the services sector, which comprises around 56 per cent of GDP, to surprise with its resilence. The sector includes things like government spending on health care and education, which are less susceptible to interest rate hikes and external factors.

While the economist was estimating 7.4 per cent overall quarterly GDP growth – a number he said was “on the higher side” – if the figure comes in below 7 per cent, he said it will at least signal to the RBI that they must ease, or at least pause, monetary tightening when they meet in mid-December, which markets can take comfort in.

Still, for the past few years, the markets may have gotten a bit too comfortable, Jagannadham Thunuguntla, head of research at SMC Global, told beyondbrics.

“There’s been a sense of complacency on the policy and the market front that growth of 7 per cent or more is a given[in India],” he said. “But what markets should realize is that India is not alone in the world, [especially] when the entire world is crumbling in terms of growth.”

Related reading:
India Inc: waiting for the drop, beyondbrics
India: if inflation doesn’t fall soon…, beyondbrics
India’s widening trade deficit, beyondbrics
India file, beyondbrics