With bank credit to the commercial sector growing just 5.3% (year to date) at the beginning of November as compared to even the low 6.5% last year, the September GDP numbers come as no surprise. At 5.3%, the growth is lower than June’s 5.5% and much lower than September 2011’s 6.7%. Indeed, if there are some positive surprises, it is the sharp rebound in manufacturing, from 0.2% in Q1 to 0.8% in Q2 (2.9% in Q2 last year)—though it has to be said the 1.2% industry growth shown by the GDP numbers is in sharp contrast to the 0.6% that the IIP numbers show for the same Q2. Agriculture clocking a 1.2% growth, though lower than the 2.9% in the previous quarter, comes as an equally big surprise given the drought, but that will presumably get reflected in the Q3 data—the CSO press release says production of rice is expected to fall 6.5% this kharif, coarse cereals by 18.4%, pulses by 14.5% and oilseeds by 9.6%. Looking at GDP data from the expenditure side is never a great idea since it gives you a 2.8% increase in Q2 GDP (even if you take into account the discrepancies, you get a 3.2% growth) which is far lower than the 5.3% growth you get from the production-side data—even the low indirect tax collections don’t explain the differences. But for what it’s worth, there has been a smart recovery in gross capital formation, from a contraction of 3.2% in Q1 to a growth of 1.4% in Q2, partly due to a much lower reduction in inventories—company-level data, on order books of the top capital goods manufacturing firms, though, don’t corroborate this trend. Consumption expenditure continued to slow, to 4.4% in Q2 as compared to 4.7% in Q1, 5.8% in Q4FY12 and 6.1% in Q3FY12—had it not been for a buoyant government expenditure, the fall would have been greater.
All this, however, is in the past. What of the current quarter and the next one, and has the economy bottomed out? If you look at the Sensex as an advance barometer, it would certainly appear so. In all probability, Q3 may not look too different from Q2 while Q4 may look a lot better; how much better will depend on whether initiatives like the National Investment Board take off and how the Aadhar-linked cash transfers add to consumption expenditure. Agriculture, which accounts for over a tenth of GDP, is likely to be negative in Q3 while industry will benefit from the dramatically lower base of last year’s Q2. Services may not grow too much in Q3, because of the strong base as well as the fact that the sharp slowdown in construction—partly due to the very slow capex cycle—will take a while to reverse. The ball remains in the government’s court. The sharp slowdown in Q4FY12 (growth was 5.3% versus 8% for Q1FY12) will, of course, help make Q4FY13 look better.