It’s important to realize that gross domestic product (GDP) growth of 5.3% in the September 2012 quarter is by no means the same thing as the 5.3% growth notched up during the March 2012 quarter. That’s because the year-on-year growth in the March quarter was on top of 9.2% growth in the GDP of the March 2011 quarter. In sharp contrast, the growth in the September 2012 quarter was on top of 6.7% GDP growth in the September 2011 quarter. In short, the base effect was very different.
Similarly, while at first glance it looks as if growth has slowed just a bit from 5.5% in the June 2012 quarter to 5.3%, it’s worth remembering that the growth in the June 2011 quarter was at 8%. Simply put, 5.3% growth over a 6.7% growth base period is actually much weaker than 5.5% growth over 8% growth in the year-ago period. The mining, manufacturing and trade sectors all showed higher growth in the September quarter compared with the June quarter because of a favourable base effect. On the other hand, the electricity, construction and finance sectors suffered because of an unfavourable base effect.
But then agricultural growth was low in the second quarter (Q2), because of a poor kharif crop. Has the non-agricultural sector done better? Trouble is, non-agricultural growth came in at 5.8% in Q2, lower than Q1’s 5.9%. So it’s not as if lower agricultural growth pulled down overall growth in the economy.
Of course, the weakness in the economy is not surprising. Everybody already knew that the economy was doing very badly in Q2, simply because growth in non-food credit in the banking sector between 30 June and 5 October was a dismal 1.4%. Indeed, as on 5 October, the RBI data shows that non-food credit growth during the current fiscal was lower than the growth during the same period last year.
GDP at market prices came in at a mere 2.8% in Q2, much lower than Q1’s 3.9%, but of course this data is riddled with flaws and has a huge amount of discrepancies. These numbers do show lower growth in private consumption and higher growth in capital expenditure, but they need to be taken with large doses of salt. Also, the base effect is at work here, too. Government final consumption expenditure continues to show high growth, indicating that government spending is helping to prop up growth—not a viable situation if it wants to reduce the fiscal deficit.
Why then did the market shrug off the GDP data? Well, it’s yesterday’s story. Nor did the markets rally on the hope that the central bank would now be forced to lower interest rates. RBI has made it amply that, in its view, lower inflation is what matters. One reason for the rally in equities is because the India story has got a bit of a boost from the Goldman Sachs upgrade and the Moody’s decision to keep its ratings stable. Liquidity flows are abundant and fund tracker EPFR Global points out, “Emerging Markets Equity Funds posted their 11th consecutive week of inflows during the third week of November. The diversified Global Emerging Markets (GEM) and Asia ex-Japan Equity Funds again accounted for all the inflows.”Even more important is the hope that the government will finally be able to push through a lot of pending legislation. As Gaurav Kapur, economist with Royal Bank of Scotland, Mumbai, put it, “The markets have realized that, for the domestic economy, things can only get better, although it’s still unclear when that will be.”
Nothing in the Q2 GDP numbers is reason for optimism and real improvement in the economy may still be some time away, but GDP growth will continue to benefit from a favourable base effect in the next couple of quarters.