India's GDP growth likely to pick up in Q2, break five-quarter slide

Bengaluru: Indian economic growth likely rebounded in the July-September quarter from the slowest growth in three years, with demand picking up modestly as the effects from a shock ban on high-value currency notes eased, a Reuters poll showed.

If that’s correct, the data will be the latest evidence of a broad-based global economic upturn across Asia and most of the world that has many major central banks poised to move away from ultra-easy monetary policy.

India was the world’s fastest-growing major economy in 2016. But already-slowing growth was made weaker by the surprise cash clampdown late in 2016 by Prime Minister Narendra Modi’s government, which has hurt consumer spending ever since.

In July, the government introduced a goods and services tax that made sweeping changes to the way businesses across Asia’s third largest economy charge taxes, delivering another blow to the economy.

But the Reuters poll of 52 economists over the past week showed gross domestic product growth likely rose to 6.4 per cent from a year ago in the July-September quarter, from 5.7 perc ent in the previous period.

If the data, due to be released on 1200 GMT on November 30, matches expectations, it will break a five-quarter slowing trend and mark the best rate this calendar year. Forecasts in the poll ranged from 5.9 per cent to 6.8 per cent.

“India’s GDP growth is expected to rebound, albeit at a slower pace, due to supply disruptions stemming from the goods and services tax,” wrote Shashank Mendiratta, economist at ANZ, who is forecasting a 6.2 per cent pace.

“However, growth was probably cushioned by festive demand, and an uptick in industrial production,” he said, referring to the national holiday of Diwali in mid-October, before which there is usually a surge in spending.

Since mid-year, sales of two-wheel and commercial vehicles, oil consumption, cargo traffic and rail freight have all increased and raised hopes that the impact of the cash squeeze has bottomed out.

Industrial and manufacturing activity as measured by business surveys has also improved in recent months. And Mumbai’s BSE Sensex index of leading shares hit a record high earlier this month.

Indeed, none of the 52 economists in the poll expected growth to slow from 5.7 per cent. But for now, few economists expect a return to growth rates above 8 per cent clocked at the start of 2016.

The Reuters poll also showed India’s gross value-added (GVA) growth estimate likely accelerated to 6.2 per cent, from 5.6 per cent.

Annual consumer inflation hit a seven-month high of 3.6 per cent in October. Oil prices and those of other commodities have risen in recent months.

The Reserve Bank of India, which cut the repo rate in August, has little room to ease any further. In the meantime, the government announced a USD 32.43 billion plan to recapitalise its state banks over the next two years.

Hugo Erken, senior economist at Rabobank, who accurately predicted the surprise slowdown to 5.7 per cent in the previous quarter, said that marked the trough in growth.

“The stimulus package from the government (has not had) any effect yet on economic activity in India. It will take some time,” said Erken, who remains the most pessimistic forecaster, looking for 5.9 per cent for July-September. But he expects a growth surge to above 8 per cent in the current quarter.