Q2FY14 GDP - NO FIREWORKS BUT AT LEAST NO DEGROWTH

By Ruma Dubey

Even before the Q2FY14 came late in the evening, the markets had drawn its own conclusions and celebrated the numbers with a 257 points jump, expecting it to be ‘much better’. But much better than what? Better than Q1 is right but YoY it remains lame. The IIP numbers for the period – July to Sept (Q2) were much better than the numbers posted in the period from April to June (Q1). July IIP came in at 2.6%, the highest in the fiscal till date, followed by a paltry 0.6% in August and then a gratifying 2% for Sept. Plus the good monsoon was sure to have given a boost to agriculture production. Exports have consistently been good and call it the “Rajan” effect or the postponement of QE tapering by the US Fed, the rupee vis-à-vis the US dollar also stabilized. Thus building on these strong foundations, the market was right in assuming that GDP would come in much better in Q2.

And they did, coming in at 4.8%, a tad better than 4.4% in Q1. In these uncertain times, if there is no degrowth, that in itself has become a cause for celebration. It came very much on the expected lines and the numbers indicate that exports have been the main driver of this growth for Q2. But the big question is whether we will be able to sustain this growth based on exports? Growth from construction and agriculture was also good but what really left everyone baffled was the 10% growth in financial services. This might be more because bank credit expanded as short term credit rose and when that dilutes over the next few quarters, this growth may come down. But if the deposit growth, continues to get the support it does, especially from the NRIs, this sector could add well to the GDP growth.

Prior to the Q2FY14, the much awaited data on fiscal deficit also came in. For the period from April to October, fiscal deficit came in at Rs.4,57,886 crore compared to the FY14 Budget estimate of Rs.5,42,499 crore. This was 84.4% of actual to Budget estimate (BE) and for the corresponding period last year, the deficit stood at 71.6% of the BE. The Plan expenditure has already ballooned to 48.3% of the budgeted Rs.5.55 lakh crore, against 43.2% in the year-ago period.  58.9% of the estimated non-Plan expenditure of Rs 11.11 lakh crore was incurred by October-end, against 57.2% in the year-ago period.

For India to grow, only consumption led investment cannot be enough; for sustainable growth over a long period of time, consumption growth has to be led by investment growth. This has been missing for some time and hopefully, we will start seeing more projects getting approvals and more projects taking off. We have started seeing some of this already, with many companies over the past few days, announcing receipt of orders.

Rabi crops are also expected to be good and rural wages are also rising. All this will also mean the rural consumption will go up and if this continues to be supported by better exports numbers, we could be pleasantly surprised in the second half of the fiscal. The GDP target for current fiscal is 5% and if we keep up the momentum, maybe getting to this goal post will not be tough.

Now the other big question – what will RBI do on 18^th December? Well, if Mr.Rajan were to pay heed to Mr.Chidambaram’s words, he should do nothing. Today, before the GDP and the fiscal deficit numbers came in, Finance Minister, P.Chidambaram said, rather late in the day (metamorphic) that the RBI policy, which is focused on curbing inflation, has little impact on prices. He has said that the consumer inflation in India is entrenched due to high food and fuel prices. Demand (for food and fuel) is being stoked by the fact that we have high fiscal deficit and that fiscal deficit was not contained for a fairly long period, I think over a period of two years. If this is the truth, then why are we currently in the regime of such high interest rates, which has culled growth and cut demand? We have sacrificed growth to curb inflation and so late in the day, Mr.Chidambaram realizes that the solution lay with them?

Yes, going ahead, things will indeed look up but fiscal compression could become the choke point. We have to brace ourselves and wait for a storm brewing on the horizon - Ben Bernanke is going to turn off the tap, some time or the other. There are solutions but the Govt has an eye on the elections and thus no right action will be taken. We all just need to let go and wait for this storm to tide over.  For now, eyes on the Assembly Elections results on 8^th December as this political judgment is expected to give us a fair idea of things to come in the Lok Sabha elections in the months to come.

The next release of quarterly GDP estimate for the quarter October-December, 2013 (Q3 of 2013-14) will be on 28.02.2014.