Why India's GDP forecast dropped to 5%

Economic momentum may have worsened.

According to Deutsche Bank, India’s industrial production declined 1.6%yoy (DB estimate was -1%yoy) in May, down from +1.9%yoy in April which constituted a -0.8%mom (-1.8%mom in April) decline on a seasonally adjusted basis.

On the back of sluggish data, Deutsche Bank is revising down the FY13/14 growth forecast to 5%.

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Consequently IP momentum (measured as the 3m/3m seasonally adjusted annualized rate) fell to -3.4% in May, from 1.9% in April.

The May IP data indicates that economic momentum has worsened in recent months. One avenue to turn around the momentum would be sustained cuts in interest rates, but the recent currency market sell-off and related inflation pass-through risk mean that further rate cuts may be delayed by a couple of months.

Looking at the latest string of data related to production, business sentiment, and trade, we feel that a growth turnaround would take longer than we had expected earlier.

The weak trend of capital goods imports suggests that the rate cut cycle (along with the various structural measures) has not yet managed to turn around the investment sentiment.

We understand that labor market headwinds have surfaced and wage growth slowed. Exports will be helped by the recent rupee depreciation in the medium term, but the near term export outlook seems lackluster all over the region.

Finally, fiscal impulse at the best case scenario will be neutral this year, with the authorities showing no desire to let the deficit to worsen. With this backdrop, we are revising down the FY13/14 growth forecast to 5%.

It may be a year of two halves, with the first half of the fiscal year printing very weak growth numbers (below-5%, perhaps) and the second half showing a modest pick-up, aided by low inflation, stabilized external environment, and resumption of the investment cycle.