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Q3 GDP numbers may show lingering weakness in economy; will it weigh on market?

The Indian economy seems to have been trapped in a downward spiral, as the GDP growth is set to slip to a decadal low of 5 percent in 2019-20.

February 27, 2020 / 01:32 PM IST

India's gross domestic product (GDP) growth for the December quarter is likely to show a lingering weakness in the economy but with a glimmer of improvement, brokerages and experts have said.

The Indian economy seems to be trapped in a downward spiral, as the GDP growth is set to slip to a decadal low of 5 percent in 2019-20.

While a fall in domestic consumption is seen as a strong reason behind the sluggish pace, the outbreak of coronavirus is likely to make the situation worse, as it will have a significant impact on global trade, production and growth.

However, good crop production, fewer weather disruptions in mining and allied sectors and the corporate tax cuts are seen as the boosters for the domestic economy.

"After slowing for six consecutive quarters, we expect economic growth to have improved in Q3 . Healthy crop production despite this year's excessive monsoon, a fading away of weather disruptions in mining and allied sectors, and some support from the corporate tax cuts as the key drivers of the growth revival," said Rahul Bajoria, Chief India Economist, Barclays, in a note.

But the signs of improvement may be too weak to be cheered.

Bajoria said that manufacturing was staging a partial recovery, improving from the contraction in the previous quarter. Electricity, gas and water would be under pressure due to adverse base effects, coupled with sequential slowdown. In the financial space, credit growth remains weak, even as monetary transmission picks up.

"While economic recovery is underway, we expect the growth rate to remain significantly below potential, with the output gap remaining negative," Bajoria said.

Rating agency ICRA expects the growth of GDP and the gross value added (GVA) at basic prices in year-on-year (YoY) terms to rise mildly to 4.7 percent and 4.5 percent, respectively, in Q3FY20, from 4.5 percent and 4.3 percent, respectively, in Q2FY20, with a modest uptick in the momentum of services (to 7.3 percent from 6.8 percent), industry (to 1.2 percent from 0.5 percent) and agriculture (to 2.2 percent from 2.1 percent).

“In our view, lower raw material costs, high growth of the government of India’s non-interest revenue expenditure and the stable profitability metrics revealed by the earnings of some banks would provide a cushion to the pace of economic growth," said Aditi Nayar, Principal Economist, ICRA.

"Overall, Indian economic growth may display a mild improvement in Q3FY20 from the level recorded in Q2FY20. However, the extent and duration of the coronavirus outbreak would test the sustainability of the nascent upturn in growth in the ongoing quarter.” Nayar added.

Nirmal Bang Institutional Equities Research, in a note, said GDP growth in Q3FY20 was likely to witness only a marginal improvement to 4.6 percent from 4.5 percent in the previous quarter.

"Agriculture, forestry and fishing are expected to see a rebound to 3.5 percent growth, up from 2.1 percent in the previous quarter, supported by a lower base, stable kharif production and a strong start to the rabi season. The dairy, livestock and fisheries sector is expected to do well, and will also be aided by higher realisations on the back of an increase in prices," said Nirmal Bang.

The brokerage expects construction sector growth to slow to 2 percent YoY in Q3FY20 from 3.3 percent in the previous quarter.

"Bank credit and deposit growth slowed, which will act as a drag on growth in the finance, real estate and professional services segment but may be offset by some moderation in funding stress for NBFCs," it added.

How will the market react?

A significant improvement in the GDP prints, which looks less likely at this juncture, will be a pleasant surprise for the market. However, softer numbers may not have a significant bearing on the market sentiment as it is already discounted.

"Softer GDP numbers are unlikely to weigh on the sentiment as the market has discounted it. The biggest worry at the moment is a coronavirus and if India sees cases of it, the market may fall further," said G Chokkalingam, Founder & MD, Equinomics Research Advisory.

Sameer Kalra, Founder, Target Investing, is also of the view that the GDP numbers will have minimal impact as the main focus has shifted to the coronavirus situation globally and its impact on growth in the current quarter.

The year 2020, so far, has not gone too well for the Indian market, thanks to a lacklustre Budget and weak global cues after the coronavirus outbreak.

Market benchmarks did hit record highs in January but turned volatile soon. As of February 26, the BSE Sensex has come off over 3 percent, while the Nifty has retreated 4 percent in the current year.

In the near term, more consolidation is expected. Market experts and brokerages are of the view that any correction amid profit-booking should be used as a buying opportunity to accumulate and increase equity allocation.

Disclaimer: The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

Nishant Kumar
first published: Feb 27, 2020 12:56 pm