Key Takeaway
Around the middle of 2011, we were concerned that GDP growth print might
fall below 6% by this quarter. Without falling in the trap of being anchored by
the most recent GDP growth to forecast ahead, we now worry that on existing
trends in capacity creation, growth print could fall to even below 5%, if not 4%,
in one of the quarters in the coming year. And an ever lower growth will still
not solve inflation. The central bank, and the industry, must recognize after
the latest GDP numbers that interest rate cuts are needed even if inflation is
to stay high, as India’s inflation is increasingly borne out of low growth (that
is a result of low supply creation) and even lower revival hopes (through the
impact on balance payment).
��
All internals worsening: As the following charts show, GDP growth deceleration should
be alarming not just because of the headline print. Almost every component of GDP by
income or GDP by expenditure had a slowdown in the latest quarter, with the only exception
being investments because of the base effect
Domestic GDP growth at below 1%: And yet even now, the internals hide more about
the slowdown than what they reveal. We start with our favourite indicator: domestic GDP
growth or GDP growth ex net exports. As the following charts show, domestic GDP growth
has fallen to below 1%. Taken at face value, latest GDP growth data suggests that almost all
of the printed growth is because of the improvement in net exports.
We are once again puzzled by the treatment of net exports in GDP statistics in the time of
sharply rising current account and trade deficits. Real GDP growth data shows divergent
trends in export and import growth trends with the former accelerating and the latter –
import growth - falling to a near flat rate.
Of course, the above trends are not at all supported when one compares the data with
monthly import and export trade statistics. The gap between trade and GDP statistics is at
the highest ever extreme. For example, trade data shows import growth at 35% in
4QFY12 while nominal GDP data has the same imports growing at mere 8%, a staggering
and unprecedented 26 percentage point gap between the two rates against a mere 1.2
percentage point median gap historically. The spread is equally GDP series favourable for
export growth too.
Financials and trade/communications continue to pull the economy, but for
how long?
The domestic GDP growth data highlighted above is subject to frequent revisions, along
with the revisions in its associated contributor net-exports. For example, after the most
recent revisions in net export statistics of the last few quarters, domestic GDP growth
seemed to have been growing at a high 9%+ rate for the previous three quarters (post
revision, headline GDP growth has roughly remained the same with net export revisions
compensating opposite revisions in other domestic components of GDP). As a result, it
becomes more imperative to slice the data separately.
Two service sub-sectors are responsible for 3.8% of 5.3% reported GDP growth in the
latest quarter. The rest, including net exports, contributed only 1.5% of the overall 5.3%
of GDP growth. These two sub-sectors are called 1) financials, insurance, real estate and
business services and 2) trade, hotels, transport and communication. One of the main
reasons why the sectors’ contributions is rising is because of their neutral weights. These
two fast-growing sectors’ weight in the data has risen substantially in the last few years as
a result of their higher growth.
There is nothing wrong with the mathematics of this. Logically, however, it must be
difficult for these two services sectors that largely depend on the health of others in the
economy to continue to pull ahead ever so strongly. To start with, anecdotal evidences
suggest that most of the businesses that make up these sectors – like financials, real
estate, insurance, trade, communication – are hardly growing as well as they used to
before. They are no longer adding employment in the same manner, for instance. Their
stocks in the stock market are not doing as well. Even sector specific data shows marked
slowdown, more than what is normally visible in GDP data.
The latest GDP is not likely to be even close to the worst of the ongoing cycle
without massive policy support
We expect the slowdown of the remaining parts of the economy to impact the growth
rates of the above-mentioned fastest growing sectors too in the times ahead. We believe
they will drag down the headline growth further. More importantly, we maintain that the
leading indicators of gross fixed capital formation, viz, project announcements, point to a
material fall in investment sub-component of GDP in the next few quarters. In our eyes,
most forecasters remain anchored to the current announced numbers while they forecast
the future. If one does not project GDP growth by looking at the current numbers, it is
difficult to not expect a further slowdown by a couple of more percentage points.
Time policymakers move away from the headline inflation obsession
India’s inflation may stay high, particularly if supply side or capacity creation remains
problematic. The RBI policy stimulus may or may not be able to induce anyone to invest
near-term, but we continue to believe that the existing interest rates are neither going to
contain inflation nor bolster growth. Rather, there is a rising risk that inflation would
worsen with such high interest rates as we showed in our previous document titled
‘Futility of half-steps’, dated 18th April 2012, if sapped investor sentiments continue to
cause bigger balance of payment and exchange rate problems.
Unlike in Brazil, Europe and Indonesia, economic community and media continue to
ignore growth emergency in India. Even if inflation hawks are right that the RBI must first
control inflation, there will have to come a time when one and all must accept that the
policy at present neither solves inflation nor helps anything else. While we do not expect
our belief that inflation in India has little to do with monetary policy in present times to
gain ground near-term, more headline weakness in growth numbers could push the
central bank towards more rate cuts in coming quarters.
As we have stated before, easier-than-expected monetary policy is one reason why the
market could remain range-bound in the range spanned so far this year despite all the
other disappointing macro news. We retain our view that the overall market remains
without decent prospects for long-term investors, but this does not mean further falls in
coming few months.
No comments:
Post a Comment