Advance GDP estimates: The half-full numbers

The advance estimate of economic growth in 2011-12 by the statistics ministry was 6.9 per cent, marginally lower than recent forecasts made by the Reserve Bank of India (RBI) and the finance ministry, which range between 7 per cent and 7.5 per cent.

It was the lowest annual growth forecast made by the statistics ministry since 6.7 per cent, recorded in 2008-09, the year when the Indian economy was adversely impacted by the financial crisis in the U.S.

According to India's chief statistician and the secretary of the statistics ministry, T.C.A Anant, the advance estimate is largely based on data from the first eight months of the current fiscal and "broad magnitudes are consistent."

Tuesday's estimate by the statistics ministry was largely in line with the signals conveyed by narrow indicators such as industrial output, and investment plans revealed by companies.
 
Despite the widely anticipated slowdown, the equity market has interpreted recent data as a catalyst for policy changes. The slowdown has convinced investors that interest rates are likely to soften soon and, in turn, the economic environment for business will change for the better.

"My reading is it's not merely liquidity, but people are placing themselves for the rest of the year," says Raj Majumder, founder of Bangalore-based fund manager, Auroch Investment Managers. "We are getting much more bullish," he adds.

The BSE Sensex closed at 17,622.45 points on Tuesday, about 0.48 per cent lower than the previous day. However, since the beginning of January, the Sensex rose by 14 per cent, driven partly by the surge in foreign portfolio flows. Foreign Institutional Investors (FIIs) have invested about $3.44 billion since the beginning of the calendar year.

"Markets are pricing in reversal in interest rate cycle,"says Upasna Bhardwaj, economist at ING Vysya Bank.

Interest rates have hardened over two years as RBI followed a tight monetary policy to combat inflation. A combination of high interest rates and a slowdown in administrative decision making has had a negative impact on investment, the key growth driver over the last decade.

With headline inflation estimated by RBI to drop to 7 per cent at the end of the current financial year, the tight monetary policy is slowly being reversed. The expectation of a continuation in the reversal has led to positive interpretation of recent data.

"The only positive aspect is reversal in policy rate cycle," says Bhardwaj. "If it eases off next fiscal, capital expenditure cycle should improve. The second half in next fiscal should see improvement in capital expenditure cycle," she adds.

The capital expenditure in the current fiscal has been one of the most disappointing aspects of GDP data. Tuesday's advance estimate showed fixed investment as a proportion of GDP in 2011-12 was 31.9 per cent as compared to 32.5 per cent the previous year.

The equity market is now betting that RBI will roll back its tight policy this year to get those investment numbers increasing again.