The Q2 GDP print remained broadly in line with street expectation. A closer scrutiny, however, raises a few concerns. First, consumption demand weakens further. Private consumption grew by a mere 3.7 per cent, markedly lower than the long-term average of over 7.5 per cent. Importantly, this is not a sudden blip – weakening in consumption has intensified since early-2012. With investment momentum remaining significantly below its trend, the persistent weakness in consumption is a concern. Consumption has typically provided a steady and elevated floor for India’s growth. Second, the sub-segment of “trade, hotels, transport and communications”, which is typically an important source of resilience for the services sector, is slowing consistently in 2012 (Rs 5.5 per cent currently, its longer term growth being over 10 per cent). Moreover, growth in agriculture remained a bit better than expected in Q2. But, it may actually take some hit in October-December quarter, which pertains to the harvest season of the summer crop.
Investment demand improved marginally from its markedly weak levels, but should not be interpreted as sign of a turnaround. Most lead indicators are still subdued. Thus, while the worst is possibly over, we do not anticipate any meaningful turnaround in near-term growth momentum. Given the benefit of a favourable base, 2012-13 growth print will likely remain somewhat supported, say above 5.5%. However, that should be interpreted with caution.
The continued slowdown has considerably increased the pressure on the RBI for further monetary easing. However, the central bank remains uncomfortable with current inflation and inflation expectations, and refuses to risk its inflation fighting credentials just yet. As a result, a balance is being attempted by the RBI as it holds rates steady. Unless we see a major downside surprises in the upcoming inflation data (headline or internals), we expect the RBI to maintain a similar stance in its December policy.
Siddhartha Sanyal
Chief India economist, Barclays
