Q1 GDP: What are experts expecting?

The April-June quarter gross domestic product (GDP) number will be announced tomorrow. CNBC-TV18 poll has thrown up a number of 5.3%, similar to the last quarter of last year. That is largely also because of a huge base.

In an interview to CNBC-TV18, Leif Eskesen, HSBC and Aditi Nayar, ICRA speak about their estimates and give their outlook going forward.

Also read: April-June economic growth seen at 5.2%, says Moody's

Below is the edited transcript of the interview with CNBC-TV18's Latha Venkatesh and Gautam Broker.

Q: Are you in agreement with this modest number of 5.3%? What else will you look out for in the GDP numbers?

Eskesen: We have 5.3% year-on-year (YoY). In terms of sequential QoQ growth, we expected a deceleration relative to previous quarter. If you look at the main components of GDP on the supply side, we expect a drag from the industrial sector. We are expecting a negative growth of 0.1% YoY in the industrial segment.

We are expecting more resilience in the services segment partly coming from a slight uptick for financial services on the back of stronger credit growth among other things. We will see annual growth rate for services pick up a bit.

Agricultural output could also hold upm atleast for now. It was still relatively late in the game that we ran into a dry monsoon. So, we don’t expect necessarily too much of an easing in agricultural output in this quarter.

Q: If the GDP print tomorrow say comes below 5% or below consensus, do you see any kind of change in RBI stance, any further slight easing or some concrete action by the RBI?

Leif: If we talk about 5% versus 5.3%, I think that is neither here nor there. That is still within that ballpark of expectations. So, it would have to be substantially below expectations or a tad below 5% and maybe in the mid 4%, before they start to feel more itchy to move.

At the end of the day, the fundamental story behind the slowdown is still there. It is not just a result of higher interest rates. It is also external factor. But importantly, it is really the supply side that has been slowing down growth because of, to some extent, lack of supply side reforms. That’s holding back. So, the RBI will still have to look at what is driving this slowdown.

Q: What are you going with? Would you agree that services might be the one that will perhaps redeem the number somewhat?

Nayar: We are going with a number of 5.1% for Q1. We are expecting a flat number for manufacturing, similar to what we saw in Q4. But we are expecting to see a deceleration in agriculture and services.

Some of the lead indicators for service sector activity are not very positive including cargo, freight, air traffic, passenger volumes. Also, we are expecting the weaker manufacturing growth is going to have a lagged effect on trade expansion as well.

Partly, we are expecting some improvement in the community social and personal services. However, that is a smaller proportion in the overall services sector. That would come from higher government spending in Q1, as far as the revenue expenditure of Government of India is concerned, compared to Q1 of last year.

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Q: Is it a likelihood at all that you get a slightly sub-5% number? Also, we have got some savings numbers from the RBI’s annual report, which indicate that financial household savings for FY12 fell by about 1.5% points to 7.8%. If you extrapolate that would mean perhaps a 2% point fall for the entire savings rate for the economy. What would you watch out in terms of the capital formation number? Would that colour your view of the full year growth?

Leif: If you look at the demand side, to be honest, I always put more face on the supply side numbers, when it comes to GDP. I still expect the weakness to persist on the investment side. That is also tied up with the structural story in terms of structural reforms that are holding back investment sentiment, investment cycle.

I think the key thing to watch out for is the extent to which private consumption is holding up, is remaining resilient. That is a factor that could also have implications for RBI’s perspective on what to do. If it is still, to some extent, structural story tied up with investment cycle and that has been held back by lack of reform, then reluctance to ease will persist.

If there is more shift towards weakness in the consumption segment then that could start to change things around as well, as far as they are concerned. So that is also something that they would also clearly look out for and so would we.

Q: Off-late there has been a lot of commentary on how the rain deficit has not been as bad as it was being projected earlier. While it may not have a lot of impact on GDP growth, do you think it materially changes the inflation assumptions? If the rabi crop turns out to be good enough, the inflation projection that the street currently has maybe slightly higher than what it actually turns out to be.

Eskesen: You are absolutely right. If we assume that the deficit remains at 13% where we are now, much an improvement relative to the earlier parts of the monsoon, I think the GDP impact is going to be maximum for the full year in the neighbourhood of 0.1% or 0.2%. That doesn’t change much. But the inflation impact could on a full year basis creep up 2.6-2.7% in our estimates. That ofcourse will have a bearing on inflation.

Ofcourse you could say that it is supply side phenomenon. But at the same time, to the extent, it impacts inflation expectations, it becomes a broader inflation problem.

Q: Is there an RBI rate cut likelihood at all on September 17?

Nayar: Actually, at this point in time, our view is that there is unlikely to be a rate cut in this September mid quarter policy. Possibly we could expect a cut towards the end of the calendar year. We are not expecting more than 50 basis points cut over the remainder of the current fiscal.

Coming back to the rain deficit and the impact of that on inflation and inflationary expectations, one of the things that we are still worried about despite the fact that the deficit has eased, the last data that we have for sowing for cereals and pulses is still showing a fairly substantial deficit. It is unlikely that a healthy rabi output could offset some of the losses that we would see in pulses for example.

We still may see an inflation impact because of the kharif deficiencies in sowing. Not certain that we are out of the woods yet, as far as the monsoon part on inflation is concerned. Definitely if we see a pick up in items like pulses in the next few weeks of sowing data where we have a demand-supply gap then perhaps we can see less of harding of inflationary expectations than what we were expecting earlier.

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Q: Is there a danger of downgrade by the rating agencies sometimes in 2012 itself?

Eskesen: I think the important thing for India is really to regulate growth. The structural reform agenda needs to get traction. We need to see some decisions tabled during the current monsoon session so that we can start to see some impact on growth. There will be positive also for debt dynamics.

Clearly, we need to see some progress on fiscal reform, fiscal consolidation that in the very near-term requires that we have adjustment to diesel and kerosene prices so the subsidy bill can get contained.

In our view and in our assessment, the fiscal deficit for the current fiscal year is going to come in at a minimum of 5.6%. It could be higher than that, the longer it takes for them to adjust diesel and kerosene prices. We had already assumed slippages on the tax side because of lower growth and also we had a lower target in any case for 2G auctions sales and investment proceeds.

But there are still downside risks on the revenue side. That is why I am saying that at the minimum 5.6% for the central government deficit and possibly wider, if you don't get traction there. But then there could also be some under spending. That is not necessarily good from a gross perspective on the capital expenditure side as well.

Q: What do you expect from the rating agencies?

Eskesen: They would watch very closely what the government does in terms of key structural reforms. That was one of the things they highlighted. They also highlighted specifically that steps should be taken to address the fiscal deficit. So, they will be watching closely for that. It depends on what ultimately transpires from the government side over the next couple of quarters.