Markets heaved a sigh of relief when Q2 (calendar year) GDP growth surprised on the upside — printing at 5.5 per cent versus the 5.3 per cent of the previous quarter and the sub-5 per cent number that had been feared in some quarters. Some may be tempted to presume from on Friday’s print that, perhaps, growth has already bottomed in India and the worst is behind us.
Such a presumption, however, would be a gross misreading of the data. The pick-up in year-on-year growth in Q2 12 masked the fact that the sequential momentum of GDP growth (quarter-on-quarter, seasonally adjusted and annualised) continued to weaken for a third successive quarter. On a momentum basis, growth has slowed to 5.3 per cent in Q2 2012 from 6.1 per cent in Q1 2012. On a sequential basis, therefore, growth is slowing, not re-accelerating!
Further, the details of the print were weaker than the headline suggested. Agriculture — which grew at nearly 3 per cent this quarter — is unlikely to sustain at these levels, in light of the deficient monsoon. While its direct effect will be felt on food production, its indirect effect will be felt through lower rural demand for goods and services. The monsoon deficiency will also pressure food inflation even more in the coming months, which will militate against urban consumption.
Another driver of growth in Q2 was government spending – which grew at a stunning 23 per cent (annualised) on a sequential basis. Even accounting for significant fiscal slippage, the pace of spending is unlikely to sustain at these levels, and will therefore constitute as another near-term drag on growth. So, things are likely to get worse before they get better on the growth front.
It must be said, however, that credible fiscal consolidation — even as it impinges on growth in the near term – is critical to preserving India’s credit rating, restoring investor confidence, containing inflationary pressures. In so doing, it is expected to boost growth in the medium term even as it drags down growth in the near term.
Most revealing, however, was the lack of disappointment and across-the-board relief with a 5.5 per cent GDP print. This suggests a dramatic fall in expectations. We have got inured to living in a low growth and high inflation equilibrium. But such a resignation is dangerous. Once growth begins a downward spiral, it becomes self-fulfilling, and increasingly hard to arrest. Rather than relief at on Friday’s print, the government needs to recognise that this is not an acceptable equilibrium. Global drags are unlikely to go away soon and high inflation has tied the RBI’s hands. Only bold policy action from the government can pull the economy out of this quagmire.
Sajjid Chinoy
India Economist, JP Morgan
