Focus on inflation than growth as a trigger: Nomura

India's gross domestic product (GDP) has slowed down to 5.3 percent in July- September versus 5.5 percent in last quarter and 6.7 percent in corresponding quarter last fiscal. It is is in-line with CNBC-TV18 poll. Poor performance of manufacturing and agriculture sectors pulled down growth in the second quarter.

In an interview to CNBC-TV18, Sonal Varma of Nomura Financial Advisory & Securities says the service sector numbers are along expected lines. "I think what we are seeing right now on the economic front is really some sort of consolidation that is going on," she adds.
Varma opines the numbers are in-line with the RBI's own guidance. "This itself would not be a trigger and in any case the growth numbers have now been slowing down for quite sometime. So we need to focus more on inflation rather than growth as a trigger for policy reaction," she says. Below is the edited transcript of Varma's interview to CNBC-TV18. Q: Wanted your thoughts with regards to services. It has been a recovery sequentially. How would you read that 7.2 percent figure?
A: It is actually along the expected lines. The big drop that we had seen in trade transportation segment that has probably has seen some rebound. However, overall if you look at the non-agriculture GDP sector, it looks like it is starting to stabilise now. I think what we are seeing right now on the economic front is really some sort of consolidation that is going on. I would not call it a clear recovery right now. On a quarter-on-quarter basis, we can get a lot of volatility, but I think what we are seeing right now has brought stabilisation in the entire non-agricultural space which itself is a positive sign. Q: With this number would the Reserve Bank be terribly displeased? Would it be moved into action in December itself?
A: No, we do not think so. This is broadly in-line with even the RBI’s own guidance. This itself would not be a trigger and in any case the growth numbers have now been slowing down for quite sometime. So we need to focus more on inflation rather than growth as a trigger for policy reaction. So in any case, the focus should be on what the next inflation print will be. This GDP print in itself will not make any changes. We are not expecting any December action. Q: Year-on-year there is Rs 4.55 lakh crore capital formation and that is a four percent growth compared to the 0.6 percent capital formation growth that we saw in the Q1. Do you think this is also atleast a bottoming out? Is this the worst? Will Q3 and Q4 be better than 5.3 percent?
A: This four percent year-on-year growth in gross fixed capital formation is definitely a positive sign. It does suggest that we are bottoming out on the investment cycle though if the headline number is lower when investment number is higher, that means that probably government consumption or some of the other components have actually seen some moderation. This is a positive sign because we have seen a lot of consumption growth in the last two-three years and not enough investment. If that composition is changing then that is a positive sign.
Is 5.3 percent the bottom, well, I think the non-agricultural sector is probably stablising but the full impact of the lower Kharif production will actually be felt in the December quarter, not in the September quarter. So I think agriculture will see a further moderation next quarter and therefore I would not say that this is necessarily the bottom. We could see numbers around these levels only in the next quarter.
_PAGEBREAK_ Q: Where would you be most concerned in terms of a parameter? Would it still stand at industries?
A: Next quarter is the quarter where the full impact of the lower kharif production will come in. So we are expecting agriculture to fall further in the next quarter. So our overall GDP growth will remain around this quarter’s level only. The last quarter is when the rabi prospects kick in and that is when we do expect some rebound in growth in the 5.5-6 percent range. Overall for the year we are at 5.5 percent. I think the agriculture side is really distorting the underlying picture and the underlying picture right now is one of stabilisation.  The picture is not one of a clear recovery as of now. Recovery will most likely happen only in the next financial year and that too will be a shallow one. Q: Do you expect the Cabinet Committee on Infrastructure or rather the National Investment Board (NIB) to come through and then exponentially increase investment as well as execution of projects, hence growth in FY14. Would you be more optimistic?
A: As compared to FY13, we are more optimistic. We are forecasting 6.2 percent for next year. But if this committee is purely for monitoring and guiding and not necessarily a single window clearance for approval, which is what we had the impression earlier, then it again boils down to whether actually the approval process is on a faster track or not. So it is a move in the right direction. However, typically we still have to wait for the committee to get formed and projects will come through. They will guide it. The approval process will kick-start before investments start picking up. All of this will take atleast 12 months to pan out. So I would not expect a big pick up in capex, particularly fresh capex in FY14 because of this. What I would be more optimistic is some of the existing projects which are stuck because of some clearances being stuck; those will get moving. So our view is there will be more productivity led growth next year rather than new capex led growth.
The other reason why we are not expecting growth to get back to 7 percent is consumption growth on the urban side is not just about inflation. Real income side income growth is not much. The job market prospects on the urban side are not very good and the non-farming sector actually has been slowing for the last 12 months and the non-farm sector now accounts for close to 70 percent of rural GDP. Our view is that consumption will also actually remain in a low gear next year. So getting to a seven handle number looks challenging in our view. Q: What is the Q3 and Q4 numbers you are working with and will you change them?
A: Q3 will be broadly flat at 5.3 percent and the Q4 we are expecting it between 5.5-6 percent. So, full year is 5.5 percent.