Falling agricultural production worries markets
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The weakness in the industrial sector will continue in the coming months
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With inflation continuing to inch lower, short-term deflationary patch can be seen by April.
While clamouring for India’s resilience on economic growth, a sharp fall in gross domestic product (GDP) growth is a major concern. The third quarter GDP growth for the current financial year slowed to 5.3 per cent year-on-year as compared to 7.6 per cent year-on-year in the previous quarter, belying all market expectations.
“This was lower than the market consensus of 6.1 per cent year-on-year and our estimate of 5.6 per cent,” says, Pranjul Bhandari, economic analyst, Goldman Sachs. The third quarter GDP data was unveiled by the Central Statistical Organisation (CSO) on Friday last.
The major hit was taken by agriculture, which worries the markets. The agricultural sector contracted to 2.2 per cent year-on-year versus 2.7 per cent year-on-year growth in the previous quarter. “Growth was below ours and consensus estimates of 6.1 per cent, with the surprise element being the 2.2 per cent contraction in agriculture (partly due to a high base effect),” says Rohini Malkani, economic analyst, Citigroup. Reflecting the same, Mr. Bhandari says, “The market was surprised by the 2.2 per cent contraction in the agricultural sector.”
Industrial growth slowed to 0.8 per cent year-on-year from 4.7 per cent year-on-year in the previous quarter as foretold by the slowdown in the index of industrial production (IIP).
Services sector growth remained flat at 9.5 per cent versus 9.6 per cent in the previous quarter as falling growth in construction, trade and hotels, which was evened out by rapid increase in community and social services. Community, social and personal services posted a robust 17.3 per cent growth in the third quarter against 5.5 per cent in the same period a year ago. Financing, insurance, real estate and business services also grew by 9.5 per cent as against 11.9 per cent. On a seasonal basis, the GDP fell 0.4 per cent quarter-on-quarter as compared to a 1.3 per cent rise in the previous quarter.
With the first nine month GDP growth at 6.9 per cent, growth in the last quarter of current fiscal would need to come in at 7.6 per cent for the government to achieve its 7.1 per cent advance estimate put out earlier this month. This appears optimistic given the weakening global environment and continued contraction in trade,” says Ms. Malkani.
Investment growth
Investment growth slumped while government consumption grew rapidly. Fixed investment demand growth slumped to 5.3 per cent year-on-year from 15.1 per cent year-on-year in the previous quarter. Private consumption growth weakened to 5.4 per cent versus 6.9 per cent.
However, government consumption growth ballooned to 24.6 per cent from 7.9 per cent in the second quarter. Exports growth increased to 11.4 per cent from 10.6 per cent in the second quarter as the impact of a weakening rupee kicked in. The growth in imports weakened due to falling domestic demand.
Pressure on RBI
Market participants believe that the weakness in the industry will continue in the coming months. The weak growth in the industrial sector was not a surprise given that coincident indicators ranging from the IIP, the Purchasing Managers Index (PMI) to motor vehicle sales were all in the red in December, and continue to be weak, signalling a continuation of industrial sector sluggishness.
“We expect the government, running an estimated fiscal deficit of 10.3 per cent of GDP, to be the fastest growing sector in the economy,” says Mr. Bhandari.
The present situation also may put pressure on the Reserve Bank of India (RBI) to revise its GDP growth projection for the current fiscal with a downward bias. “We expect GDP growth to slow to 6.7 per cent in 2008-09 and further to 5.8 per cent in 2009-10 with risks firmly placed on the downside for both,” says Mr. Bhandari.
Policy rates
This is likely to lead to a further cut in policy rates. “We expect the RBI to cut the reverse repo and repo rates by 50 basis points each before end-March, and the cash reserve ratio by 150 basis points by the summer,” says Mr. Bhandari.
Though Citi estimates India’s GDP growth in 2009-10 at 5.5 per cent, expecting a contraction in exports, a further deceleration in investment, and a moderation in consumption, the level of agricultural production is a worrisome matter. While the investment and urban consumption story was showing signs of weakness, given the fiscal stimuli (farm waiver, NREGS, and higher support prices), there was optimism around rural consumption holding up. “However, the weak agriculture numbers are a source of worry; and trends would need to be closely monitored. With inflation continuing to inch lower, we expect to see a short-term deflationary patch by April. This coupled with weak data and the model code of conduct coming into effect raises the probability of the RBI reducing policy rates in the near term,” says Ms. Malkani.
The RBI’s mid-term review of October 2008 had estimated the real GDP growth for 2008-09 at 7.5-8 per cent. “Since then, the outlook on real GDP growth has been affected further and the downside risks to growth have amplified because of slowdown in industrial activity and weakening of external demand as reflected in the decline in exports.
“The services sector activities are likely to further decelerate in the second half of 2008-09. Keeping in view the slowdown in industry and services and with assumption of normal agricultural production, the projection of overall real GDP growth for 2008-09 is revised downwards to 7 per cent with a downward bias,” the RBI stated in its third quarter review of its annual monetary policy in January this year. Now the same reasons attributed by the RBI, like agricultural production, are not able to hold good for the future.
OOMMEN A. NINAN
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