GOING DOWNHILL?

With India’s 2009-10 Q3 GDP estimates

showing a subdued growth of 6.0 per
cent over the third quarter of previous
year 2008-09, is it correct to say that we
need to be skeptical of achieving the
targeted growth rate of 7.2 per cent for
the full year 2009-10?

This article analyses the key dampeners

of the subdued GDP numbers and what
is the road ahead for GDP and what kind
of policy response is likely from both
the central bank & the central
government.

Rama Krishna Vadlamudi December 1st, 2009

The GDP estimates from the Central Statistical Organisation (CSO) show that
the country’s Gross Domestic Product (GDP) has grown by a subdued 6.0 per
cent during the third quarter (October to December 2009) of this fiscal year 2009-
10. This is substantially lower than the second quarter (Jul-Sep09) GDP growth
rate of 7.9 per cent. In fact, the higher second quarter GDP numbers have
convinced the government authorities to scale up the GDP forecast for the full
year 2009-10, from the year beginning projection of 6.5 per cent up to 7.2 per
cent as per the advance estimates released by CSO.

Amid the din and noise of the Budget 2010-11, investors, economists, media and
businessmen seems to have ignored the modest GDP figure of 6% growth for the
third quarter of 2009-10 announced by the CSO after the closure of markets
hours on February 26, 2010. No one seems to have been perturbed by the low
third quarter GDP figure of 6 per cent. For India to achieve a stated growth rate
of 7.2 per cent for the entire year 2009-10, it has to achieve a growth rate of 8.6
per cent in the fourth quarter, which may be a tall order at this juncture.

As such, on Tuesday, the 2nd of March, Indian stock market may witness some
sell-off from equity investors. So, be prepared for a bumpy ride going ahead!

This article analyses the factors driving the numbers and what the future
holds in terms of GDP for the fully year and the outlook on interest rates:
 Rama Krishna Vadlamudi, BOMBAY March 2, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com

What are the highlights of the Third Quarter GDP?

GRAPH 1: Quarterly GDP growth rate %:

India’s GDP is estimated to have grown by

rd Quarterly Grow th Rate % y-o-y
6.0 per cent during the 3 quarter of fiscal
2009-10. This is much less than the 7.9 per
cent growth rate achieved in the second 9
7.90
quarter (Jul-Sep09). 8 7.50 7.60

7 6.10 6.20
6.00 5.80
The lesser growth is due to negative 6
growth of 2.8 per cent and 2.2 per cent 5
registered by Agriculture and Commu- 4
nity etc. services respectively. Of course, 3
growth in financing, insurance, etc, is 2
very modest at 7.8%. However, manu- 1
facturing sector showed a spectacular
growth of 14.3% for 3rd quarter. Mining Q3 Q2 Q1 Q4 Q3 Q2 Q1

and quarrying also did well with 9.6% 2009-10 2008- 09

growth.

* GDP at factor cost at constant prices (2004-05)

GRAPH 2: QUARTERLY GDP NUMBERS (Rs ‘000 crore):

As can be seen from the Graph 3 depicted below, India’s Gross Domestic
Product was projected at Rs 11,58,764 crore during the third quarter of fiscal
2009-10, that is for October-December 2009. This is against the GDP of Rs
10,93,167 crore achieved during the third quarter of 2008-09, showing a subdued
growth of 6.0 per cent year on year. These GDP figures are at factor cost at
constant prices (new base year 2004-05). (The base year is changed recently
from 1999-2000 to 2004-05).

Quarterly GDP data (Rs '000 crore)

1 200
1 150
Rs '000 crore

1 100
1 050
1 000 1 159
1 110 1 093
950 1 049 1 040
900 972 980
850
Q3 Q2 Q1 Q4 Q3 Q2 Q1

2009-10 2008-09

* GDP at factor cost at constant prices (2004-05)

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 Rama Krishna Vadlamudi, BOMBAY March 2, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com

Is there any indication that the 3rd quarter GDP would disappoint?

In fact, in my article titled: “India’s GDP-Spectacular Second Quarter Growth” dated December
1st, 2009, I had clearly expressed my skepticism about achieving the desired level of third quarter
GDP due to the higher base effect of October-December 2008 quarter.

The article can be accessed at: www.scribd.com/doc/23415555

The excerpts from page 8 of the above article are reproduced here:

“The crucial quarter this year could be the third quarter (Oct-Dec 2009) GDP numbers.
Before jumping into any conclusion about any growth rate of the full year, some economists
are cautioning that we need to wait till the third quarter GDP estimates are out.

“As the Graph 3 on page 3 above indicates, the base for third and fourth quarter of last year
(2008-09) seems to be very high with the third quarter Oct-Dec 2008 GDP at Rs 8,80,000
crore and the fourth quarter Jan-Mar 2009 GDP at Rs 9,02,900 crore. Interestingly, these
figures are much higher than the Jul-Sep 2009 quarter GDP of Rs 8,34,800 crore. (All these
GDP figures are at factor cost at constant prices – 1999-2000.) This is very significant and
going by the present macro economic indicators, the overall picture seems to be that the India’s
chances of achieving a GDP growth of seven per cent for the fully year are somewhat drab, if
not impossible – unless some positively dramatic developments happen in the US or Europe.”

As stated in the above article dated December 1, 2009, the third quarter GDP was sluggish at 6.0
per cent as compared to the third quarter of 2008-09.

What are the other highlights of the 3rd quarter figures?

The negative growth of 2.2 per cent in the growth of ‘‘community, social and personal services”
for the Oct-Dec 2009 is mainly on account of high base in third quarter of 2008-09, following the
implementation of Sixth Central Pay Commission’s recommendations.

The negative growth of 2.8 per cent in Agriculture is due to drought conditions experienced during
the 2009-10 Kharif Season – which has caused a fall in the production of cereals, rice, sugar,
oilseeds and pulses in the range of 10 to 20 per cent.

TABLE 1: QUARTERLY GDP GROWTH RATES* %:

QUARTER FULL YEAR

FIN. YEAR Q4 Q3 Q2 Q1

2009-10 - 6.00 7.90 6.10 7.20@

2008-09 5.80 6.20 7.50 7.60 6.70

* GDP at factor cost at constant (2004-05) prices @ Projection by CSO

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 Rama Krishna Vadlamudi, BOMBAY March 2, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com

When will RBI hike interest rates?

According to the advance estimates of CSO, the Gross Domestic Product (GDP) for the
full year 2009-10 is expected to grow by 7.2 per cent. Which means that the GDP for the
fourth quarter has to grow by 8.60 per cent – this appears to be somewhat difficult under
the given circumstances. Much depends on the growth of services, which is yet to
recover from the shocks of global financial meltdown.

The figures of GDP and IIP (index of industrial production) indicate that the recovery and
growth rate in manufacturing sector are much better compared to services. It may further
be noted that the weight of services in the overall GDP is more than 55 per cent, with
manufacturing sector chipping in with 25 to 28 per cent and the rest contributed by
Agriculture. Agriculture is facing several problems and as such we may not expect from
this sector. As such, the onus is on services sector, which depends heavily on global
recovery. In fact, the US has reportedly grown by 5.9 per cent for the October-December
2009 quarter, which is only a tad below India’s growth rate of 6.0 per cent for the same
quarter. Does it mean that India’s growth rate is not much better compared to the growth
rates in the developed world?

Keeping this subdued GDP figures in mind, RBI and the Government have been
approaching the withdrawal of fiscal and monetary stimulus cautiously. RBI raised CRR
(cash reserve ratio) by 75 basis points during their quarter review of monetary policy. But
it has not touched Repo rate (under its Liquidity Adjustment Facility), which has been
kept at 4.75 per cent since the middle of the global financial meltdown. However,
inflation seems to be out of control as food inflation is hovering around 18 per cent. So,
will RBI keep quite till the second week of next April as far as Repo rate is concerned?

Even the Government is circumspect about raising excise and service tax to the pre-
crisis levels. Recently, it has raised excise duty from 8 per cent to 10 per cent in the
Budget 2010. But it has not touched service tax and retained it at 10 per cent. As such,
we may not expect any policy action from the RBI or the Government for the next six to
eight weeks at least.

Will GDP for the full year 2009-10 cross 7 per cent?

While the government authorities seem to be confident (they have to be optimistic

always!) of achieving the targeted growth of 7.2 per cent for the fully year 2009-10, as
put out by the CSO, the decline in Agriculture production and modest growth rate in
services sector are causing concern at this point of time. As such, a little dose of
skepticism about achieving the full year target of 7.2 per cent GDP growth is not wholly
uncalled for despite the well-choreographed crooning being done by the Government’s
cheerleaders (the likes of Ahluwalias, Rangarajans, Chawlas, Basus, etc).

Date source: CSO-Central Statistical Organisation Graphics: Author

Photo courtesy: Bing

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