Recovery tough, agri growth may give respite in Q3: SBI

The gross domestic product (GDP) growth for first quarter came in on Friday at 4.4 percent against the 4.7 percent expected by the street. In an interview to CNBC-TV18 Soumya Kanti Ghosh, chief economic advisor, SBI (State Bank of India) said that economy is unable to recover on trade, hotels and transport and communication components, given the trends in the consumer expenditure. Maintaining a growth rate in excess of 5 percent is also unlikely, he says.

Below is the verbatim transcript of his interview on CNBC-TV18 Q: What do you think of the 4.4 percent GDP number? A: We were expecting a growth rate of around 4.7 percent, so it has come below that. There are two important points here, the growth rate in this trade, hotels, transport and communication was not surprising because if you look at the index of industrial production (IIP) numbers in the first quarter the consumer growth rate has almost collapsed. Consumer durables have been running at -10.4 percent in the first quarter. I was not surprised but if you look at the service sector growth rate which has locked in growth rate of 6.6 percent and trade, hotel, transport and communication, when we had 9.3 percent growth rate in FY11 the weighted contribution of this trade, hotel, transport and communication was around 3.4 percent. It has progressively declined and it was around 1.7 percent out of 5 percent growth rate last year. So, if it continues to grow at this rate even if we get a very good number on the government expenditure which is due to government taking a huge expenditure in the first half and also the other portion, the finance, insurance, real estate will not be able to get a growth rate of services in excess of 6 percent. Any growth rate in services not in excess of 6 percent will have an exponential impact on bringing down the GDP growth rate to the current projections. Secondly, with regards to agricultural growth rate this year, there were some estimates recently saying that it could grow as much as 4-5 percent. With a weightage of 14 percent here, the agricultural numbers for the first quarter, I was expecting little better but generally the Q3 of agriculture is always the best year. If you look at the weighted contribution of agriculture, any growth rate below 5 percent will not incrementally add to the GDP numbers. Only if we have a growth rate of around 7.5-8 percent, which we had two or three years back when 7.9 percent was the growth rate, then we could have a material impact on the GDP numbers. At 4-5 percent even if that is the growth rate, it will only add around 70 basis points to the GDP numbers. So, if we are unable to recover atleast on trade, hotels and transport and communication side which will be difficult given the trends in the consumer expenditure it may be a difficult task for us to maintain a growth rate in excess of 5 percent. Q: What would your new numbers be if any for Q2 and for full year? A: I don’t believe Q2 numbers will be spectacular. It could be a tad lower than the Q1 number at 4.4 percent because of all the disturbance in Q2 and till now the currency supportive measures are in place. So, we could get a growth rate tad lower than 4.4 percent or similar. I am a bit optimistic about Q3 because it is generally the quarter where the agricultural growth rate peaks if we go by the past experience. Any agricultural growth rate in excess of 6 or 5 percent could add 15 basis points to the weighted contribution. So, I hope agricultural growth rate picks up significantly because there is also a base effect involved. Last year the agri growth rate was around 1.9 percent. So, from that point of view it could add a bit to the GDP numbers. However, unless this service sector doesn’t log in a growth rate in excess of 6 percent, it may be a bit difficult to pull up the growth rate beyond 5 percent because in manufacturing I am not expecting a big recovery. There could be some amount of recovery but that only in the next 2-3 months after measures have been discontinued. So, only agricultural sector can pull up the growth rate and to some extent the service sector but the way it has been performing, the trade component, this will also be a bit difficult. So, my estimate could be 5 percent or may be a bit less than that.