India GDP update from Rajesh Sharma Money Matters Financial Services limited
India’s Q4 FY12 GDP dropped 5.3% and FY12 GDP at 6.5% beats expectation.
A slump in the services sector pushed the headline GDP growth to an all time low since the time this series began in 2004-05. GDP growth in this quarter at 5.3% y/y was even significantly lower than the 5.8% witnessed in the immediate aftermath of Lehman collapse. Services contribute 59% of the overall GDP – slipped below 8% y/y versus 8.9% in the previous quarter. The slip was primarily driven by slower economic activity. December 2010 slower services growth was masked by the base effect.
This shows that the weak industrial slowdown which has plagued the Indian economy since 2011 has finally spilled over the services sector. Retail and wholesale domestic trade( as captured in the “trade , hotels, transport and communication”) , a good proxy for strength of consumer demand and an important component of the services sector ( almost 50% of services sector is explained by this) has slipped to 7% y/y (9.2% in the previous quarter) and is the weakest since March 2009. Other segments in the services sector like “financial, real estate and insurance” and “community social and personal services” fared reasonably well.
Industry sector the greater shock has been the construction sector. The cement sales, steel production has been lower in this quarter when compared to the previous. However a 4.8% growth in construction in Q4 FY12 when compared to 7.2% in Q3 FY12 shows that the weakness was more pronounced than what had been anticipated.
On an expenditure basis there have been significant data revisions. This data series looks like has been no relevance in the policy making decision. Data shows that private consumption remained unchanged from previous quarter levels and investment has picked up 3.6% vs. -0.3% in the previous quarter. Given this backdrop the FY 13 does not look promising for the GDP outlook. There are multiple factors which our economy struggles with. Apart from global scenario, internally India faces strong challenges with its own macro fundamental struggles. Rupee continues with its free fall and RBI has no weapon to protect this. This itself captures the huge risk and the crisis the country heads into. India should enact sooner on its policy and structural reforms in order to remain immune from other outside factors. The twin deficits of current account and fiscal deficit is very high and in the regions beyond control. So as soon as the government wakes up it is better for the country to withstand the strong wind. CMD Rajesh Sharma Money Matters Financial services Ltd says a rate cut is likely in the June 18 policy.
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