Will macro data, firm crude prices force revision of GDP forecasts for FY18?

Are we likely to see another round of downward revision of economic growth forecast for the current fiscal by various agencies with deteriorating macroeconomic numbers unfolding, crude oil spiking above $60 per barrel and some economists pegging second-quarter growth at around 5.9%-6.3%?

Most of the economists DNA Money spoke to said the current GDP growth projections--ranging between 6.7% and 7%--did seem a bit "optimistic" in the light of the latest economic figures but added that a lot would depend on how crude prices trended from hereon.

There is, however, one divergent voice of Hugo Erken, senior economist at RaboResearch Global Economics & Markets, who believes that India's national income growth rate for this fiscal may well come within the forecast range when he estimates a 6.8%-6.9% growth for the current year.

The Dutch economist was on the mark in his prediction of the first quarter GDP growth at 5.7% when most others had estimated it to come over 6%.

"For fiscal 2018, our forecast is 6.8%-6.9% and the financial year after that (2018-19) it is 8%," he told DNA Money over the phone from Netherlands.

But, even as he expects the full-year GDP growth to be in line with predictions made by most economists, he estimates the second or September quarter (Q2) growth to be around 5.9%-6%. Rating agency Icra, in its report on Index of Industrial Production (IIP) for September, has put the gross value added (GVA) growth for the same quarter at 6.3%.

"Based on the available data on industrial output and corporate earnings, we expect a broad-based recovery in industrial sector in Q2 FY2018, relative to performance in Q1 FY2018, which should support an improvement in GVA growth to around 6.3% in Q2 FY2018," said the Icra report authored by economists Aditi Nayar, Mukul Gupta and Medha Sinha.

Going by these two early forecasts for the Q2 GDP, the cumulative growth for the first half of the fiscal (H1) would be 12% (Icra) and 11.7% (Erken), which means India would need to grow between 7.5% and 8.15% at an average in the third and fourth quarters to achieve 6.7-7% growth for the full year as predicted by different economic researchers.

Nayar, principal economist of Icra said her rating agency's forecast for GVA and GDP growth for the current fiscal was 6.6% and 6.7% respectively. However, she was keenly watching the crude prices for any "relook" at those figures.

"A major factor that we will assess while forecasting the GDP and GVA growth is whether crude oil prices sustain at these levels (over $60 per barrel) because that will eat into corporate earnings across the board and would warrant a downward revision," she told DNA Money.

D K Srivastava, chief policy advisor, EY India, also believes most of the current GDP forecasts were "optimistic". His own outlook was slightly subdued at "6.5% or less" for this fiscal.

"These estimates appear to be optimistic now. And probably it (GDP) will be coming at 6.5% or less for the whole year. Even 6.7% growth, which the RBI has given, requires third and fourth quarter GDP to be at 7.5%. That seems a little difficult," he said.

Post-June, there has been a spat of downward revisions in growth forecasts. The mid-term Economic Survey brought out chief economic advisor Arvind Subramanian, gave a wide range for GDP growth in the current fiscal at 6.75%-7.5%, pointing that the "higher end of the projection would be difficult". World Bank tweaked it to bring it down to 7% from 7.2% and ADB to 7% from 7.4%. Last month, the central bank also warned of inflation heating up while pulling down its growth projection to 6.7% from 7.3% for the current financial year.

The GDP growth has been falling since the third quarter of last fiscal. It fell to 7.1% in the third quarter from 7.7% in the quarter before. Then, it dipped to 6.4% in the fourth quarter. In the first quarter of the current fiscal, it slipped to 5.7%. Most economists are expecting a recovery in the second quarter but it could be scuttled on rising oil prices and disappointing macros.

EY's Srivastava believes the pressure to adhere to fiscal deficit target and spiralling crude prices may weigh on government's efforts to provide fiscal stimulus through increased public spending for a recovery.

Rabobank's Erken, though, is not drawing such a dismal picture. He sees a rebound in growth numbers from the third quarter (Q3) to 8% and above. His optimism stems from the fact that the adverse effects of demonetization and newly-launched goods and services tax (GST) were fading. His projection is also guided by "closing of output gap" and government stepping up expenditure and divestment.

"GST impact, which will peter out, is something that will have an effect on GDP growth in the second quarter. We see a quick rebound in the third quarter. Demonetization had an effect in the Q4 of last fiscal and Q1 of the current fiscal. We think the sluggishness in that respect will also peter out. We expect growth to accelerate due to the closing of the output gap. If you look at expenditure components, we also see that the infrastructure investments and divestment are picking up. So, if you add all these up, you arrive at 8.5% growth in Q3," said the Dutch economist.

Though, he is cautious in his optimism, adding a rider that crude prices could play havoc if it shoots up or remains at elevated levels.

"It (higher crude prices) will prop up inflation. We already saw last month (October) inflation was a bit higher than expected. So, it might be one of the factors that could weigh on GDP growth and its recovery. You still have to see what happens in Q2. If oil prices are higher than I will have to adjust the inflation part (in Q2), which will feed into Q3 (GDP outlook) but at the moment I think I have to look at the positions of oil prices and if it continues to move up or wouldn't come down anytime soon I'll also have to adjust the Q3 GDP (forecast)," he said.

Martin Wolf, associate editor and chief economic commentator at UK's business daily Financial Times, said if India's growth shot up to 8% in the next couple of quarters then it would be "remarkable" but not "inconceivable".

"It would be certainly remarkable if growth accelerated to 8% in the next couple of quarters since that would be bringing India up to growth rate it hasn't achieved in a long time. I don't know what optimism it's based on but it's not inconceivable if investment picks up strongly," he told DNA Money from London.