Economy may see more pain

At 5.5 per cent, gross domestic product growth for the first quarter of FY13 may have 'beaten' consensus estimates, but the economy may not have bottomed out yet.

Economists believe that if the government's inaction continues on key reforms and the global situation does not stabilise, growth could contract further.

This theory will find support in HSBC's purchasing managers index manufacturing, which has declined marginally in August to 52.8 from 52.9 in July.

Slowing exports and power outages have resulted in slower output growth at factories.

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This is apparent from the accumulation in stock levels.

So far, the economy has been battling a slowdown in the domestic market, but the numbers for August make it obvious the sharp fall in exports has started affecting the manufacturing sector.

Despite the slowdown, 'output prices rose at an accelerated pace due to higher import costs and taxes," explains Leif Eskesen, HSBC's chief economist for India and Asean.

"Weak global macro economic conditions and lack of power are dragging down industry growth, which is already hurting due to insufficient progress on structural reforms aimed at alleviating supply side constraints and reviving the investment cycle," he said.

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The manufacturing sector's lacklustre performance is expected to continue for another quarter.

Things may improve in the second half of the year if global and domestic situations improve.

Else, this phase of contraction may continue.

Economists are divided on where the economy will head in the second half of FY13. Morgan Stanley believes if the government's inaction continues there's a high risk of potential 'deeper macro stress,' which entail a deceleration in GDP growth to 4.3 per cent.
The brokerage assigns a 35 per cent probability to this scenario.

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But, if the government takes aggressive policy action to revive the investment cycle and brings down fiscal deficit, then it would support stronger growth.

Morgan Stanley has cut GDP forecast for FY13 to 5.1 from the earlier 5.8 per cent.

Mole Hau of BNP Paribas also believes the Indian economy will struggle to see growth recover to trend anytime soon.

Hence, our forecast of 5.7 per cent for FY2013.

In sharp contrast to this bearish view most economists have, Ritika Mankar Mukherjee of Ambit Capital expects the policy dynamic to improve in September, with the Shome panel recommending diluting the negative impact of GAAR substantially.

This along with a small rise in diesel prices would improve sentiment.

Ambit has reiterated its GDP forecast of 6.3 per cent for FY13.