Structural reforms and the re-establishment of fiscal discipline are needed for the economy to return to over 7% GDP growth rates, says BNP Paribas Asian Instant Insight

Indian GDP (gross domestic product) growth nudged down to 5.3% y-o-y (year-on-year) in Q2 FY2013 from 5.5% previously. Seasonally adjusted, GDP is estimated to have risen by just 4.1% q-o-q (quarter-on-quarter) annualised. On the expenditure side, sluggish consumption growth was noticeable. On the output side, manufacturing and agricultural outputs were weak. GDP growth for FY2013 as a whole now looks on course for 5.4%. These are the main points highlighted in another tepid GDP report, which underlines the marked deterioration in India’s macro-fundamentals in recent years. This analysis is by Richard Iley, Asian Instant Insight, BNP Paribas.

The BNP Paribas analyst points out that the silver lining is in the trend GDP probably still being close to 7%. Considerable slack is opening up, paving the way for some limited easing by RBI perhaps as early as January 2013. But structural reforms and the re-establishment of fiscal discipline are needed for the economy to return to 7%+ growth rates.

There is however, a stark warning from the BNP Paribas analyst that the politicians in power in India may not be ready for the discipline that is required. The chaotic start to Parliament’s Winter Session reinforces how difficult this will be, given India’s dysfunctional and fractious politics. A radical recasting of India’s growth versus inflation mix looks unlikely. And if the reform push stalls, the 5%-6% growth rates seen over the last year will become increasingly locked-in.

Giving reasons while analysing the GDP data, BNP Paribas says that the main reason for the low GDP growth was the weakness in agricultural output. Despite the late improvement in this year’s monsoon, further weakness is probable next quarter in agricultural output. Services output particularly in the hotels and distribution category was also somewhat softer than anticipated. Its growth was sluggish at 7.2% y-o-y. Manufacturing output, up just 0.8% y-o-y, was also an important contributor to the lower growth in the economy. Monthly industrial production data indicate that little improvement is likely next month.

On the expenditure side, fixed asset investment improved a little but, at 4.1% y-o-y, it continues to undershoot overall GDP growth. Kickstarting the investment cycle remains the key to reviving growth, observes BNP Paribas. Private consumption also continued to slow, up just 3.7%, suggesting that slow growth is denting labour market performance even as stubborn rates of food inflation are eating into disposable income. Lastly, export growth was also muted, up 4.3%, reminding that India is not immune from sluggish global growth, particularly the recessionary Eurozone.

According to the prediction by the BNP Paribas analyst, the RBI (Reserve Bank of India) may choose to look through the woes of the economy and cut interest rates as early as January. Given tight liquidity, an earlier (and further) CRR cut at its December policy review looks likely too.

Finally, while the government’s intentions are sincere, there are constraints which the current UPA government faces in effecting even limited reform measures, concludes BNP Paribas.