GDP growth: Will Indian economy reach 7% rate? Surprise in store

As the Central Statistics Offices (CSO) will be presenting India's Gross Domestic Product (GDP) data for the third quarter October - December 2017 (Q3FY18) of FY18, the economy is expected to bring some surprises as Gross Value Added (GVA) indicators have gathered momentum in the past few months. 
 
Although India's Gross Domestic Product (GDP) revived to 6.3% in second quarter of FY18 (Q2FY18), experts were not convinced that the country's economy is moving on a sustainable path. GDP in June - September 2017 (Q1FY18) quarter stood at 5.7% - which was at three-year low. 
 
After Q2FY18, it may be noted that many major experts slashed down their forecast for Indian economy for the current fiscal. 
 
Not only experts, even CSO and Economic Survey 2018 believed that India has potential to grow below 7% till end of FY18. 
 
According to the Economic Survey 2018, the country’s gross domestic product (GDP) will grow by 6.75% this fiscal which was significantly lower than the previous fiscal’s estimates that positioned the economy to grow at 7.1%.
 
Even the CSO in its first advance estimates of GDP growth for current financial year stated that Indian economy will expand by 6.5% in 2017-18. CSO's projection was even lower to what analysts’ predicted for India's GDP growth. 
 
IMF in its World Economic Outlook update in January 2018 said that India will grow by 6.7% in FY18, 7.4% in FY19 and 7.8% in FY20. 
 
Fitch Ratings believes that Indian economy will grow to 6.7% in FY18 from earlier 6.9% citing weaker than expected rebound. The US based agency stated that the GDP growth has "repeatedly disappointed" in recent quarters, partly because of one-off factors including the demonetisation programme of November 2016 and disruptions related to the implementation of the Goods and Services Tax (GST) in July 2017.
 
Fitch alone is not disappointed by the country's current growth rate, CRISIL too has projected India's GDP at 6.8% with downside bias from previous 7% for FY18.
 
But tables have turned now, as India's GDP in Q3FY18 is expected to take a massive upturn and may even reach near 7%, as many indicators to determine the economy has shown positive momentum. 
 
Let's see how indicators have performed between October and December quarter. 
 
Agriculture activity
 
This section has remain slightly sluggish, as rural wage growth also slowed from 7.2% YoY in 2QFY18 to 5% in 3QFY18. 
 
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16 out of the 23 industry groups in the manufacturing sector have shown positive growth during the month of December 2017 as compared to the corresponding month of the previous year. 
 
Manufacturing PMI rose to a 5-year high in December on the back of robust growth in new orders and reduction in GST rates.  However, mining activity, as measured by the IIP, slowed from 7.2%YoY in 2QFY18 to 0.8% in 3QFY18. Electricity production also slowed from 6.1% YoY in 2QFY18 to 3.8% in 3QFY18. 
 
At the same time,  Corporate sector’s performance, as measured by operating profits of a sample of BSE 500 companies, also rose 9.8% YoY in 3QFY18, up from 7.8% in the previous quarter.
 
Considering above, John says, "We expect industry excluding construction to grow 6.7% YoY in 3QFY18, a tad below 6.9% posted in the previous quarter. While the manufacturing sector’s activity is expected to register a pick-up, sluggishness in mining activity and lower electricity production may act as a drag.”

Meanwhile, the rupee is not expected to weaken significantly, according to a separate Reuters poll of foreign exchange strategists. But analysts eye GVA to come in the range of 6.7% - 6.9% for Q3FY18, and GDP to near 7%. 
 
Dasgupta says, "We expect GVA growth to pick up to ~6.7% YoY from ~5.8% YoY in H1 FY2018, led by a broadbased improvement in all three sectors of the economy."
 
While John expects  GVA growth to come in at about 6.9% YoY for 3QFY18. 
 
Overall for GDP numbers in Q3FY18,  DasGupta said, "GDP growth is expected to clock ~6.9% YoY in Q3 FY2018 (~6.0% YoY in H1 FY2018)."
 
In John's view, GDP will come in at 7% for the quarter. Similar was the view of Morgan Stanley and State Bank of India this week. 
 
Morgan Stanley said, "We expect the economic recovery to have gathered further momentum with GDP growth accelerating to 7.0% year-on-year in the December-17 quarter from 6.3% in the September quarter."
 
SBI says, "GDP growth in Q3 of current fiscal could be in the higher end of 6.5%-7% bucket."
 
If this is the case, GDP will reach near 7% in Q3FY18, which means Indian economy has recovered from GST and demonetisation shocks, and the Q4FY18 may even come in higher trend - which would mean the country will regain its spot in becoming fastest growing economy. 
 
Dr Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI, said, "Q4 FY18 GDP could even top 7%."