Expert views: Economy grows 5.3 percent in September quarter

MUMBAI Fri Nov 30, 2012 11:51am IST

Labourers work inside an iron factory on the outskirts of Jammu November 12, 2012. REUTERS/Mukesh Gupta/Files

Labourers work inside an iron factory on the outskirts of Jammu November 12, 2012.

Credit: Reuters/Mukesh Gupta/Files

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MUMBAI (Reuters) - India's economy grew at a lower-than-expected 5.3 percent in the quarter ending in September, against an analysts' forecast of 5.4 percent, government data showed on Friday.

The manufacturing sector grew an annual 0.8 percent during the quarter while farm output rose 1.2 percent, the data showed. In the quarter ending in June economic growth was at 5.5 percent.

Asia's third largest economy is still growing faster than many other major economies, but it has slowed from 6.5 percent in the 2011/12 fiscal year and 8.4 percent in the previous two fiscal years.

COMMENTARY

RAJEEV MALIK, SENIOR ECONOMIST, CLSA, SINGAPORE

"The GDP data are pretty much in line with expectation and we expect the December quarter GDP to be in the 5.0-5.5 percent range as well, before improving in the March quarter.

"There is a low-level stabilisation in the economic activity taking place. The GDP data do not alter our full-year 2012/13 GDP growth forecast of 5.5 percent, improving slightly to 6 percent in 2013/14.

"The government only woke up at the end of September, and this GDP data do not capture the impact of that change. There will be a time lag as financial markets discount the likely real economy impact."

"We do not expect the RBI to cut rates in December but forecast it to cut 25 basis points in January. And, over the course of next year, we expect 100 basis points reduction in the repo rate. RBI's walk does not echo its hawkish talk about high inflation. It already has a stealth easing in place but seems shy to openly acknowledge it."

ROBERT PRIOR-WANDESFORDE, DIRECTOR, ASIAN ECONOMICS RESEARCH, CREDIT SUISSE, SINGAPORE

"Today's number suggests that the economy still remains soft, but not as weak as some people were anticipating. Growth below 5 percent looks very unlikely to me.

"The growth is bottoming and we will see an improvement from here, though not a very strong improvement.

"The growth is below the Reserve Bank of India's trend growth expectation, and I think the central bank will cut rates further from here. I expect a repo rate cut in January and there could possibly be another cash reserve ratio cut in December."

BRINDA JAGIRDAR, CHIEF ECONOMIST, STATE BANK OF INDIA, MUMBAI

"There is a wide-scale slowdown in growth and focus now should shift from inflation to growth. Growth has become critical as consumption is stalling on top of continued investment slowdown. Growth needs to get traction and for that RBI needs to cut rates and reforms need to pick up. We expect RBI to cut rates by 50 basis point and CRR (cash reserve ratio) by 50 basis points in December."

RAHUL BAJORIA, REGIONAL ECONOMIST, BARCLAYS CAPITAL, SINGAPORE

"There is some minor improvement in manufacturing sector but it is still scraping the surface while services sector still looks weak. The underlying momentum for growth is still weak in India. Government spending is fairly a big part helping support the momentum. There could be some realignment in expectations at the margin for those who were expecting a sharp slowdown in growth. I don't think this print will change RBI's views as it is flattish from the previous quarter and should be within RBI's expectation. We expect GDP for December quarter to be around 5.5-6.0 percent and in March at 6.0-6.5 percent."

RADHIKA RAO, ECONOMIST, FORECAST, SINGAPORE

"Domestic markets held on to gains as the Q3 GDP was along expectations, though undeniably the momentum is still biased for weakness as external uncertainties depress related domestic engines, consumption slows on high rates and near-stalled reforms agenda fails to thaw investment interests.

"For RBI, this data would be important though is essentially backward looking. Inflation thereby will be the main determinant of the policy direction and despite the soft GDP number, RBI will be in no rush to lower ahead of Q1 2013. Progress on reforms and proper functioning of the parliament will be important in shaping sentiments further out."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"I think we will be able to clock a 5.8 percent growth for the full fiscal year. However, slow investment and manufacturing growth remains the pain points.

"The second half of the fiscal year will be slightly better than the first half, and we expect growth to be around 6 percent during the period.

"The global environment is improving, some policy action is happening in India that will boost overall business sentiment and improve the investment climate, and agricultural outlook is likely to be better than previously expected, which will aid growth."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"I feel today's GDP growth is a bit overstated due to higher than rationally expected growth in primary sector. There is likely to be a downward revision in this number, going forward.

"There are pressures on the Reserve Bank of India to lower interest rates from all the quarters but the RBI will base its decision primarily on the basis of evolving inflation trajectory, which does not look favourable at this juncture."

A.PRASANNA, ECONOMIST, ICICI SECURITIES, PRIMARY DEALERSHIP IN MUMBAI

"From the RBI perspective, this number should not make much difference because the central bank's full-year estimate is similar to this. Also, this data is two months old and the RBI will be looking at current trends. The sentiment has improved, we need to see whether the industrial production data also shows improvement.

"I don't think the RBI has completely disregarded the weakness in growth, but we need to see the next two inflation readings. If inflation peaks out below the RBI's estimate and the trend of lower inflation continues, chances of a rate cut go up in January. But at this point we expect the RBI to cut rates by 25 basis points in March."

SHAKTI SATAPATHY, ANALYST, AK CAPITAL, MUMBAI

"Though agriculture and manufacturing output remained subdued, the growth sustenance in the service sector defies any considerable slowdown.

"Further, we believe the recent reform initiatives from the government would have a positive bearing in the overall growth numbers in the coming quarters. The probability of a December rate cut based upon today's number seems restricted and the central government timely fiscal actions would be the major driver for a rate cut in conjunction with the inflation numbers."

AMOL AGRAWAL, ECONOMIST, STCI PRIMARY DEALERSHIP, MUMBAI

"The deceleration in services is alarming. Overall, growth continues to be below the potential growth rate of 7 percent.

"I expect liquidity to tighten further with about 750 billion rupees of advance tax outflows in mid-December. The RBI will have to do a 25 bps or probably higher CRR cut. However, I do not expect anything on rates."

UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI

"While the headline GDP has more or less been in line with expectations, signaling that the non-farm GDP has stabilised, consumption data suggests that private demand has been sagging. Going forward, we expect seasonal demand to show some improvement in the overall demand to record an annual growth of 5.7 percent."

ANJALI VERMA, ECONOMIST, MF GLOBAL, MUMBAI

"The number is slightly better than my 5 percent forecast, primarily driven by agriculture. However, there is no overall improvement in macro numbers and services had another disappointing quarter.

"I still hold on to my 5.3 percent GDP growth forecast for the full fiscal year. Given that RBI has said that October inflation is still high, I do not see it cutting rates in December."

MARKET REACTION

The rupee rose marginally, while federal bonds and stocks were broadly unchanged after the data.

The Sensex extended gains to 0.4 percent from 0.3 percent beforehand.

The rupee was at 54.54/56 to the dollar against 54.61/64 previously.

The 10-year bond yield was at 8.17 percent, unchanged after the data. It was down 4 basis points after the central bank announced open market operations.

BACKGROUND

- The economy is set to grow at its slowest pace in a decade this fiscal year. Manufacturing is contracting and exports are falling. October trade deficit of nearly $21 billion was its worst on record. Yet, there is political opposition to opening up the economy and allowing foreign investment, such as in supermarkets.

- India's deficit-cutting plan is faltering as the clock ticks. The finance minister has banned government officials from holding conferences at five-star hotels, restricted travel and ordered a freeze on hiring to fill vacant posts. But a series of revenue-raising setbacks since October 29 means it will be almost impossible for the government to meet its fiscal deficit target of 5.3 percent of GDP.

- RBI Governor Duvvuri Subbarao went against the suggestion of most external members of an advisory panel and kept the key repo rate steady on October 30, minutes of the quarterly meeting showed.

- The inflation rate is still high, Subbarao said on November 16, suggesting that the bank is unlikely to loosen monetary conditions anytime soon to support faltering growth, despite a slight easing in prices last month.

- Headline inflation was at 7.45 percent in October, unexpectedly dropping to its slowest pace in eight months.

(Reporting by Treasury team; Editing by Ranjit Gangadharan)

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