Experts tell CNBC-TV18 that the GDP growth figure for the third quarter, due tomorrow, could be as low at 6.4%. Speaking to CNBC-TV18, senior economist and Royal Bank of Scotland, Gaurav Kapur, said that the number to keep an eye out for is the services growth. "If that comes above 8.5%, it will push the number closer to 6.5% and vice versa. So services will be the one critical thing to look at," he said.
Chief Economist at Yes Bank , Shubhada Rao agrees, but expects the sector to grow by 9.6%. "What really has been a drag is mining," she said. Yea Bank anticipates mining sector to see a de-growth in the third quarter. Rao further adds that "agriculture, industry and services, services sectors will be the ones which will provide support to our 6.4% forecast for the third quarter."
Also read: GDP growth may be slowest in over 2 years
On the whole, Kapur says that while the headline number might disappoint, the devil is in the details, so they should be scrutinized to determine what they point at for the coming quarters.
Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.
Q: What are you working with and what else would you watch out for other than the topline GDP number?
Kapur: We are looking at a number slightly lower than 6.5%. It is about 6.4% to be precise going by the very dismal IIP growth of 1%. For the farm sector, because of a very high base last year, we are looking at 5%. It will be crucial to see how services perform because a number anything above 8.5% will push the number closer to 6.5% and vice versa. So services will be the one critical thing to look at.
The other thing of course will be the expenditure-wise classification of GDP. There again we know that this particular quarter, the investment activity was particularly weak whereas consumption held on. So we would perhaps need some kind of a reiteration of that. We would like to tie in with the overall estimate of CSO for the whole year which means that if with 1% growth in this quarter, you should see some improvement in the next quarter in manufacturing sector in particular for us to see 6.9% or even 7.1% kind of growth is what the Prime Ministers Economic Advisory Council has suggested.
So I think the devil really will be in the detail. The headline as you said might disappoint but one should look at the details as to how they look like and in terms of what they point at for the coming quarters.
Q: What about you? What kind of a number you think might scare the Reserve Bank into taking some kind of a rate action or March 15th?
Rao: I think quite clearly a sub-6%, somewhere between 5.5-6% would be alarming enough because these are the growth rates which we saw post-Lehman. I think the average was just about touching 6%.
We have seen sequentially the headline GDP number dropping starting from June to September. If it indeed slips below 6% in the December quarter, quite clearly that would be a bit of an alarm and would probably prompt to Reserve Bank of India to review their intended actions.
I think quite clearly services have remained very resilient. We are at 9.6% for services for the third quarter. What really has been a drag is mining which is going to be probably clocking the lowest ever in terms of headline growth of negative 4.6% is what we are anticipating.
Proxy indicators for construction seem to suggest that the sector will move up from 4.3% in the preceding quarter to say close to 5%. But overall, if I were to look at the sectoral indices, agriculture, industry and services, services sectors will be the ones which will provide support to our 6.4% forecast for the third quarter.
Q: So you are placed at 6.4% for Q3, but what about FY12 as a whole and also in terms of services specifically for Q3?
Rao: Q3 as I said, services is 9.6%. For FY12 GDP we are looking at a 7.1%. We haven't yet changed our forecast; we are looking at a marginal improvement. I would like to reiterate that probably this is the quarter where growth has bottomed out, the October-December quarter. In March we are expected to see improvement at least on some bit of services and agriculture and within industry in construction.
So overall, we could see minor slippage in services in the last quarter but aggregating it, the GDP would be totally at about 7.1% as per our estimates. On expenditure, I quite agree with Gaurav that investment has been continuously slipping.
But also a point to keep an eye on would be the drag of net export. Now the third quarter also had a deeper net export, negative zone. So I think that also will be a drag on expenditure side while consumption may have held up relatively better but it would be investments and net exports which would overall continue to drag.
Q: We have got four years of falling gross fixed capital formation and gross savings rate. Would this quarter only add to that trend?
Kapur: It looks like. I don't think there will be any significant change in the trend from what we have seen so far. In fact as Shubhada also pointed out, this particular quarter, perhaps the economy bottomed out. We know that looking at the IIP data at least it is very clear that the investment activity really is where all the slowdown was largely visible. So I wouldn't be surprised if we do see a contraction year on year in Q3 in terms of gross fixed capital formation.
Q: And you don't think that number would be enough to propel the Reserve Bank to do anything in March?
Kapur: Not really. I think if the overall headline number falls below 6%, and that too if it is on account of a slowdown in private consumption, that's when I think RBI will take a notice of it. It's a well known fact, when RBI reiterated its new GDP forecast in the previous policy, they mentioned 7% growth. They would have taken into account the slowdown in the investments.
But if consumption is holding up, it means that along with supply side pressures now emerging again from oil, you also have some support from demand in terms of inflation. So RBI could take some more time if it's really investment activity which is contracting because that's a well known fact. I don't think that adds any new information for the RBI.
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