It’s becoming a familiar story: economic or corporate performance may turn out better than expected, but everybody brushes that aside because the reports relate to earlier months and the downward momentum has gathered pace since then.
India’s GDP data for the September quarter, too, has beaten expectations, but the numbers are likely to get worse.
Let’s take the figures one by one. Gross fixed capital formation grew at a year-on-year (y-o-y) rate of 13.8%, well above the 8.9% y-o-y growth rate notched up in the June quarter. But the credit crunch since September has seriously affected the expansion plans of firms.
As Goldman Sachs Group Inc. economist Tushar Poddar had pointed out in a research note: “As the market valuation of capital drops relative to the cost of acquiring new capital, (also known as Tobin’s Q) firms will prefer not to acquire new capital and postpone investment decisions.”
In future, the growth rate for capital formation is expected to plunge. At the same time, private consumption growth was at 5%, compared with a growth rate of 7.9% in the June quarter. An inkling of that trend was seen in the negative growth for car sales while retailers, too, have reported fewer customers. In future, job losses will also contribute towards keeping private consumption in check.
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Construction growth, at 9.7%, also beat expectations since most economists were expecting it to be affected on account of the slowdown in real estate. All the more reason to be sceptical of this growth rate in future quarters. And since construction has strong linkages with the rest of the economy, a slowdown in this sector will have a wider impact.
The trade, hotels, transport and communication sector held up quite well during the September quarter, growing at an annual rate of 10.8% against 11.2% in Q1. But after the Mumbai attacks, the hotels sector is likely to be hit badly.
Also, as A. Prasanna, economist at ICICI Securities Ltd, says, growth in railway freight showed a decline in October, against the year-ago period.
The financing, insurance, real estate and business services sector grew by 9.2% in the September quarter, almost the same as the 9.3% growth in the previous quarter. With IT services firms reducing their guidance and with cracks in the outlook for real estate, this sector, too, could come under pressure in the next quarter.
And finally manufacturing growth, too, could slow further, because the slowdown in exports has just begun.
The only silver lining could be the outlook for community, social and personal services, where the impact of the Pay Commission could be felt in the next quarter.
In fact, notwithstanding the relatively robust Q2 numbers, Macquarie Securities economist Rajeev Malik has revised his GDP forecast for the full year from 7.2% to 6.8%, which means he’s expecting growth of just 5.8% in the second half. But perhaps we can console ourselves that, as the table shows, we’re not doing badly compared to the rest of the world.
Graphics by Paras Jain / Mint