3 reasons why GDP data is likely to disappoint today

India’s annual economic growth probably held steady in the January-March quarter at 6.1 percent and the global economic slowdown, government policy paralysis and a record low currency suggest little chance of a pick up in the current quarter.

A poll of 31 economists produced a median forecast of 6.1 percent, unchanged from the growth of the October-December quarter. Forecasts ranged from 5.5 percent to 7.3 percent.

While 6.1 percent would be the envy of most developed nations, it is the lowest growth rate for India in almost three years. Growth slowed for seven successive quarters through the three months ended December 2011.

[caption id=“attachment_326869” align=“alignleft” width=“380” caption=“Growth slowed for seven successive quarters through the three months ended December 2011. Reuters”]  [/caption]

“Growth is constrained because of three main factors,” said Leif Eskesen, economist at HSBC.

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“Lax affects of monetary tightening, the spillover to domestic sentiment because of the weak global economic backdrop which is also hurting exports. And thirdly the persistence of policy paralysis is also hurting investor sentiment and that is of course hurting the investment cycle.”

GDP probably rose 6.7 percent in the fiscal year to March 2012, the slowest pace in three years, and well below the 8.4 percent clocked in the previous year.

The Reserve Bank of India had predicted growth of 6.9 percent.

“We continue to expect the investment cycle to be relatively subdued because of these factors. You will see the domestic private consumption still reasonably resilient but most of the slowdown will be from the investment side,” said Eskesen, who expects April-June growth at 6.2 percent.

WEAK INVESTMENT CLIMATE

Indian industrial production, which accounts for about 15 percent of GDP, grew at a muted annual pace during the first three months of the year, averaging just 0.6 percent.

Factory sector growth picked up in April, helped by bulging order books, the HSBC-Markit purchasing managers’ index shows, but the output index fell for a third straight month, suggesting the sector is not out of the woods yet.

India’s car sales rose in April just 3.4 percent from a year earlier, the weakest pace since a surprise 24 percent drop in October and sharply below the 13.2 percent annual growth in April 2011.

“We are dealing with a very weak investment climate because of domestic lack of confidence as policymakers are really slow in approving structural projects and India’s businesses do not have faith in the fundamentals being turned around by policy,” said Dariusz Kowalczyk at Credit Agricole-CIB.

A sluggish global economy has also cut demand for India’s goods overseas, despite the falling rupee, which means exports may also not grow enough to compensate for the domestic weakness.

CURRENCY HEADACHE

The weak rupee - which has shed nearly 12 percent from its 2012 high - adds to policymakers’ headaches by elevating import costs, most notably for crude oil, 80 percent of which must be shipped in from overseas. It also adds to the burden and risk exposure of Indian firms with foreign-currency debts.

Rising inflation

High inflation, stoked in part by the falling rupee, leaves the central bank little room to cut interest rates further. The RBI last month delivered a larger-than-expected 50 basis point cut in benchmark rates but warned that it sees limited scope for more reductions.

“A cheaper rupee is probably helpful but it does mean that inflation pressures will be higher rather than lower and that will make it even harder to cut rates further,” said Andrew Kenningham, senior global economist at Capital Economics.

However, India’s growth rate will still remain higher than many Western economies, which are either contracting or showing only anaemic expansion.

The euro zone economy came to a standstill in the first quarter of the year, while the United States grew at an unimpressive 2.2 percent annualised rate.

Other major Asian economies are also slowing down. China’s economy grew 8.1 percent in the first quarter from a year earlier, its weakest pace in almost three years.

Reuters