IIP to impact Indian economy? GDP numbers may come at 6.7% in Q3 - Analysis is here

It seems a new trend is emerging with respect to the growth of Indian economy. India’s Gross Domestic Product (GDP) numbers are expected to come in at 6.7% in third quarter of FY19, which would be lower compared to 7.1% growth rate witnessed in Q2FY19. This time it would be India’s industrial production or factory output which will be the real spoilsport for the country’s economy. According to SBI’s  Composite Index for February month  increases marginally to 50.60 which is a low growth compared to same month a year ago. While, the monthly SBI Composite index has declined to 11-month low of 46.10 in Jan’19. Thus, IIP numbers for Feb’19 will continue to stay lower at 2%-3%. 

SBI Composite Index, a leading indicator for manufacturing activities in the Indian Economy aims to foresee the periods of contraction and expansion. The Composite Index has mainly two indices i.e. SBI Monthly Composite Index and SBI Yearly Composite Index.

With the decline in growth in the SBI Composite Index, Dr. Soumya Kanti Ghosh Group Chief Economic Adviser at SBI says, “ we believe IIP Manufacturing growth may grow at 1.5% and IIP may at 2.5% in Feb’19.”

India’s factory output finally saw some revival in December 2018, by recording growth of 2.4%. This month's IIP stands at 133.7. This is higher compared to 0.3% growth witnessed in November 2018 and 8.4% in October 2018. Cumulatively  for the period April- December 2018, the IIP growth rate comes at 4.6% over the corresponding period of the previous year.

Within IIP, India's core sector growth slows down to 17-month low of 2.6% in December, 2018 due to contraction in the production of crude oil, petroleum refinery products and fertilizer.

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In this midst, Ghosh also highlighted that, our Composite Leading Indicator (CLI) which has a one-quarter lead over non-agricultural GDP growth, is signaling a moderation in economic activity for Q3 FY19. The CLI Index (a basket of 32 leading indicators) is based on monthly data which shows the early signals of turning-points in economic activity. 

Based on the Leading indicators yoy performance, Ghosh says, “ we are expecting the GDP growth to be around 6.6%-6.7% in Q3.”

Interestingly, the CSO has recently revised the GDP growth for FY18 from 6.7% earlier to 7.2%. At this rate, FY19 growth rate would have been at 5.9% (earlier 7.2%). 

“ We however believe, that the GDP deflator which is presently at 4.1%, could be revised downwards by at least 50 bps, thus pushing the GDP close to 7.2% in FY19,” Ghosh added.