Although GDP growth in the second quarter was higher at 7.3 per cent compared to 7.1 per cent in the first quarter, economists are not impressed and think the recovery has been shallow. Further, they expect GDP to shrink in the third quarter owing to the fallout of demonetisation. They are cutting their forecasts for full-year GDP growth by 30-50 bps.
Care Ratings Chief Economist, Madan Sabnavis, said GDP growth in the second quarter has been driven to a large extent by government spending. While manufacturing, trade, transport and finance have grown at lower rates, capital formation continues to fall, reflecting low private investment, he said.
He said in his report, "Under these conditions, we revise our GDP estimate for the year to 7 per cent from 7.3 per cent earlier with a downside risk, depending on how fast normalcy returns to the economy on the currency front. (7 per cent growth is based on Q3 growth of 5.5-6 per cent and Q4 growth of 7.5-8 per cent)."
Bank of America Merrill Lynch's economist, Indranil Sen Gupta, said in his report, the numbers and activity indicators support their call that the Indian economy is growing at 4.5-5 per cent (in the old GDP series), consistent with previous downturns.
He has cut their growth forecasts by about 50 bps to 6.9 per cent in FY17 and to 7.2 per cent in FY18 after September growth disappointed at 7.3 per cent (7.5 per cent was the consensus expectations) with demonetisation set to hit activity in December as well.
He reiterates his view that lending rate cuts (75 bps by Sept 2017) hold the key to recovery. In addition, the turnaround should be driven by a pick-up in consumption, driven by the Seventh Pay Commission and better rains, rather than investment, although an adverse wealth effect from demonetisation should dampen demand in 1H17.