Moderation In India’s GDP Growth May Have Started In Second Quarter


The Indian economy which grew at a fast clip in the first quarter of the current year may have started to slow, even before the full impact of the ongoing liquidity strains hits the real estate sector.

Gross domestic product growth in the July-September period is seen at 7.5 percent, according to a Bloomberg poll of economists. This is lower than the 8.2 percent growth reported for the first quarter of the year. Growth in gross value added is pegged at 7.3 percent compared to 8 percent in the first quarter. GVA growth has become a preferred measure of economic activity as it strips out the impact of indirect taxes and subsidies.

“One of the current concerns is a potential slowdown in economic growth, the bulk of which is likely to be manifest in Q3 FY19, but which is likely to have started in September 2018 itself, largely in financing led consumption,” said Saugata Bhattacharya, chief economist at Axis Bank in a report earlier this week. Axis Bank expects second quarter GDP growth at 7.6 percent and GVA growth at 7.4 percent.

Among the key sectors, agriculture is expected to show a strong growth in output but subdued farm prices may mean that rural demand conditions remain muted. This, too, could dampen growth. “Headline Q2 GVA growth could be 7.3-7.4 percent, due to the slowing of rural demand,” said Soumya Kanti Ghosh, chief economist at State Bank of India.

Other demand indicators such as commercial vehicle sales, domestic air passenger traffic and cement production has maintained double-digit growth, which could mean that growth holds at between 7.3-7.5 percent. Growth in Q2 will be helped by a weak base in Q2 FY18, Ghosh added.

Industrial activity is seen slowing, with ICRA estimating growth at 7.1 percent in Q2 compared to 10.3 percent in Q1. GVA growth for manufacturing, in particular, is seen dropping to 7 percent in the September-ended quarter compared to 13.5 percent in the June quarter. In contrast, construction activity is expected to have remained strong going by cement and steel output trends.

“The sequential decline in the year-on-year GVA growth in Q2 FY19, relative to Q1 FY19, is expected to be led by industry (to +7.1 percent from +10.3 percent) and agriculture (to +3.5 percent from +5.3 percent), even as the momentum for the services sector is likely to improve (to +7.8 percent from +7.3 percent)”, Aditi Nayar, Principal Economist, ICRA.

Within the services segment, stronger government spending driven public administration and financial services is likely to offset weaker construction and trade, said Bhattacharya of Axis Bank.

Most economists expect growth to remain slow in the second half, with full year growth expected to settle at between 7-7.5 percent. The Reserve Bank of India has pegged growth at 7.4 percent for the current year.

“Going forward, GVA growth in Q3 and Q4 are also likely to fall (based on current understanding to 6.6 percent and 6.3 percent, respectively), with a full-year FY19 growth likely to print at 7.1 percent, with a slight downward bias”, Saugata Bhattacharya, Chief Economist, Axis Bank.

With growth moderating and inflation remaining below estimates, economists expect the Monetary Policy Committee to hold rates when it meets next week.

“We reiterate our call that the RBI will likely pause for the rest of FY19 but remain watchful on upside risks to inflation,” said Kotak Institutional Equities in a report this week.


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