Q1 GDP Data

Should India get accustomed to a new normal in growth?

The GDP data announced for the first quarter of the current fiscal has come in lower than expected. GDP growth rate was at 7.1% annualized for the quarter ending June 2016. This compares unfavorably with the 7.5% reported in the corresponding period last year and 7.9% reported in the previous quarter. There are 3 key implications …

Get the bigger picture right…

 GDP is, after all, not an isolated number. It is the combination of the growth in agriculture, industry, services and government expenditure put together. The IIP numbers reported as of June has been showing a consistent pressure on the manufacturing sector. The construction space, which is the normal lead indicator for revival in economic growth, has been a major laggard. Within the IIP basket, capital goods have been seeing consistent negative growth over the past few months. It implies that a revival in the capital cycle is still some time away. A cursory glance at the corporate results for the last quarter indicates that most of the advantage this quarter has come from quicker growth in EBITDA and better OPMs, not better revenues.

Could make flows circumspect…

 It needs to be remembered that within the emerging markets basket, funds are overweight on India by 50% over the assigned MSCI weightage. This leaves little margin of safety for global investors looking at Indian markets as a de-risked bet within EMs. Secondly, 7.1% growth in this quarter means that full year GDP could be well-below the 8% growth estimated by the Niti Aayog. With China’s growth showing signs of improvement, this will narrow the gap between India and China resulting in India losing its growth advantage over China. Lastly, most of the corporate earnings growth estimates are based on GDP growth closer to 8%. This also means that the attractiveness of India due to its low ratio of Market Cap to GDP may lose some of its sheen.

What does this imply for rates?

Interestingly, the GDP data may also have an impact on the way the RBI looks at its rate outlook. Normally, weak GDP is a strong justification for rate cuts. However, the Indian situation gets complicated as the transmission rate is as low as 40%. The low GDP may be interpreted as an outcome of poor transmission and the RBI may choose to wait till the time there is better transmission performance.

Of course, this is only the first quarter and hence cannot be entire reflective. Also, the actual disbursal of 7CPC and OROP will have an impact on demand and therefore on GDP. That will be the big hope for the Indian government. 7.1% GDP growth has surely put the government in a spot of bother! ©

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