Analysts’ expectations for India’s GDP for the second quarter, due to be released on Friday, do not paint an optimistic picture, with everything from exports to domestic demand dragging growth down.
The forecast in a Reuters poll of economists was for 5.3 percent year-on-year GDP growth for the second quarter in India, the same figure as in the first quarter, but many analysts are even more pessimistic.
“We penciled in 4.8 percent year on year so we actually think growth slowed once more in the second quarter. We base that on looking at the monthly data, unfortunately it didn’t show any sign of a pick-up,” Sukhy Ubhi, Asia economist at Capital Economics, told Emerging Markets.
Politicians but also analysts have called on the RBI to cut interest rates to boost sluggish growth but the bank has to fight stubborn inflation, despite a one-off performance last month that was better than expected.
“We still have very weak domestic demand,” Ubhi said, adding that manufacturing and services PMIs were also weak and “a lot of the weakness in the industrial sector is still evident.”
“On the exports side, the deterioration in foreign demand isn’t helpful. “
“It’s all pretty poor,” Ubhi added. Even looking ahead, we’re not very optimistic about growth in coming quarters.”
The weak growth can “remain self-sustaining” in the near term, according to Siddhartha Sanyal, director and chief India economist at Barclays Capital, who projects 5.3 growth for the April-June quarter.
OTHER SIGNS OF WEAKNESS
Sanyal said in a research note that the slope of the yield curve – as the difference between the yield on 10-year and 3-month government debt – “typically demonstrates a decent relationship with near-term Indian growth” and currently the spread is “remarkably narrow”, of only around 8 basis points on average between April and July, indicating muted growth expectations.
The long-term (over 10 years) average is around 120 basis points.
Non-oil imports, another indicator correlating with momentum in the economy, also show softer growth, he said. “While gold imports, which witnessed large spike in 2011, are down, it seems that even non-oil, non-gold imports are also slowing due to weaker business confidence and anemic investment growth. Demand for capital goods and machinery has been retracing as well,” Sanyal wrote.
Another sign that growth will be weak is demand for automobiles, which has been softening for a while, he said. Passenger car sales’ growth fell into the low single digits compared with the long-term average of around 18 percent while sales of commercial vehicles fell by about 12.5 percent in July.
The services sector growth was weaker as well, with railway freight traffic starting to fizzle out after an initial pick-up in the first quarter, and this is likely to show up in poor transportation data, Sanyal noted.
Weakness was visible over the past months in tourism indicators such as air travel or tourist arrivals, despite Indian rupee depreciation of around 19.5 percent against the dollar and of 8 percent against the euro in one year, he said.
Softness may prevail in the retail and communication sector, banking and financial activity remains moderate and anecdotal evidence suggests weakness in real estate, according to the Barclays economist.
“Government services growth remains moderate as well, reducing the possibilities of any sizeable near-term counter-cyclical growth support,” he pointed out.
RBI’S DILEMMA
India targets rates of growth of around 9 percent a year to keep up with the growth of its population and Prime Minister Manmohan Singh said earlier this month that high growth was a matter of national security, according to Reuters.
Rating agencies have been making noises that the country’s sluggish growth and lack of reform could mean that it is the first of the major BRIC emerging markets to be downgraded to “junk” status – below investment grade – and the probability of it actually happening is not negligible.
“In terms of the growth outlook being so poor it certainly a possibility that [a downgrade below investment rate] could happen,” Ubhi said.
The government has estimated economic growth of 6.7 percent in the March 2012-2013 period, while the RBI estimate is slightly lower, at 6.5 percent.
The RBI is “in a tough spot,” Sanyal said, because it is constrained by stubborn inflation to keep rates high but the continuously weak growth, a softening in core inflationary pressures over the next three to six months, near-zero fiscal spending headroom and only hesitant government policy initiatives to revive the economy will make clear the need for further cuts.
“Monetary support is effectively the only tool left in the policy toolkit,” Sanyal said. Barclays Capital expects the RBI to cut repo rates by one full percentage point by the end of March next year.
“The timing of such cuts will depend critically on the trajectory of inflation in the coming months. Accordingly, a delay in further cuts in the repo rate cannot be ruled out, in which case larger rate cuts might come in the latter half of the year,” he said.
But Bank of America Merril Lynch economist Indranil Sen Gupta thinks the RBI must first take other measures.
Gupta expects the RBI to increase liquidity to pull down lending rates by using its Open Market Operations and by cutting Cash Reserve Ratios (the amounts that commercial banks need to hold at the RBI as a percentage of the deposits they collect).
“We do not expect the RBI to cut rates till inflation comes off around end-2012. In our view, rate cuts by the RBI are unlikely to achieve much unless bank liquidity improves,” Gupta said.