Without one-time RBI bump, Q3 growth at 4.3-4.4%
Given the third quarter GDP growth of a mere 4.7%, and a core sector growth of just 1.6% in January, the only way to explain the surging Sensex is that it reacts more to opinion polls—predicting a Narendra Modi-led NDA government—than it does to hard data. But the hard reality is that, were even this to happen, reviving the growth momentum is going to be an uphill task since the momentum right now is still a downward one—that is, the much-touted bottoming out has not yet happened. Growth in investments has been in the 5-6% range for the past 10 quarters, a far cry from the 15-20% range in 2011—in Q3, gross capital formation contracted 1.9%. Private consumption has grown at just around 5% in the last 7 quarters compared to double this in the first few quarters of 2011. Indeed, had it not been for the $34 billion the RBI managed to get by way of FCNR deposits in the last quarter of 2013—the result of it agreeing to share the cost of currency hedging with investors—the growth would have been dramatically lower than even the 4.7% headline number. The bulk of growth in Q3 came from a bump in the financing/insurance sub-sector where the major change was really the FCNR deposits growth, considering that the credit growth bump seen in Q2 tapered off by Q3. Since this segment’s growth rose from 10% in Q2 to 12.5% in Q3, this alone resulted in a higher growth of 0.48 percentage points. In which case, it is a safe bet to assume Q3 GDP growth was around 4.3-4.4% without the one-time RBI bump.
Once you adjust for this, achieving even the 4.9% forecast in the Advance Estimates will require a 8% or so agriculture growth, up from Q3’s 3.6%. That is not unfeasible—Q4FY11 agriculture growth was 7.9%—but it is nonetheless a tall task. The real question then is how FY15 growth will look, more so since this will take place in the backdrop of a new government. The big hope here is that the R6.6 lakh crore of projects cleared by the Cabinet Committee on Investments and the Project Management Group will start getting off the ground soon, so the impact will be seen in FY15. That, however, is a pious hope since many of the projects probably don’t make financial sense any more. In the roads sector where, for instance, the Rangarajan committee has not offered any major concessions, but has merely agreed to allowing promoters a larger window of time in which to make their payments, the response of road developers has been less than tepid. While investors will undoubtedly be more enthused if the next government is seen as more keen on growth than social inclusion, perhaps the best bet over the next few quarters is for RBI and banks to find ways to pressure India Inc to start deleveraging. It is only when the books of both banks as well as India Inc are cleaner that a new investment drive can even be financed.