India’s growth number for July-September surprised neither forecasters nor markets. At 5.3% year-on-year, growth in gross domestic product (GDP) matched expectations of a further fall from the previous quarter’s 5.5%. The stock market therefore marched to global tunes, driven by optimism about resolution of the US fiscal cliff and improving recovery in China. That might well deliver the stimulus India sorely needs at this point for much of the output decline was caused by a sharp slowdown in exports, which grew just 4.3% vis-a-vis 10.1% the previous quarter.
Economic activity in India has stabilized at low levels, in the range of 5.3-5.5% for 2012, but the stretch is now five successive quarters from last year when adjusted for seasonal factors. With interest rates set to fall, a possible pick-up in the global environment and some conscious government intervention to help, could there be an upward swing ahead? Is this why markets are unperturbed by past performance?
The likelihood cannot be ruled out. The core sector, a set of 8 infrastructure industries such as petroleum, steel and electricity with a 38% weight in the overall industries index, grew 6.5% in October, the highest in the last eight months. Earlier, non-oil imports (minus gold) showed a strong rebound, car sales growth started to rise on an annualized, three-month moving average basis and excise tax collections rose in September. Most recently, a forward-looking indicator—the HSBC’s Purchasing Managers’ Index for manufacturing—rose to a five-month high of 53.7 in November from 52.9 in October (September, 52.8); the trend reveals steady rise in sequential momentum from higher export and domestic orders, lower inventories and a higher output index. Growth in fixed assets (4% y-o-y against 0.7% in the second quarter) from disaggregated GDP components ties in with these developments as exports correlate strongly with investment, albeit with a lag.
Monetary trends back real economic activity: deseasonalized, non-food credit growth (three-month moving average, annualized) has risen to 16% in November from 12% in October; seasonally adjusted growth of aggregate deposits matches this at 16.2%, demand deposits are rising and the increase in money multiplier is stable from August indicating credit-creation.
Are the markets predicting a turnaround then? Typically, a rise in markets (i.e., price-to-earnings ratios) is followed by a subsequent rise in GDP growth, although the current increase outpaces the fundamentals. If past tendencies repeat, there may be better times ahead. A lot depends upon external demand though, as the full impact of a poor monsoon upon agriculture, which grew just 1.2%, will be captured in the last quarter of 2012. Plus, consumption and investment are both strained from inflation as well as high levels of indebtedness of firms and government with consequent stress upon the banks. These are problems that are unlikely to disappear soon and will contribute to a weaker rebound. For these reasons, government intervention to expedite investments is essential to nurture domestic demand and support the nascent signs of upturn.
Renu Kohli is a New Delhi-based macroeconomist; she is currently lead economist, DEA-Icrier G20 research programme, and a former staff member of the International Monetary Fund and Reserve Bank of India.