Why India's growth in real GDP stands out

Will this finally pull inflation down?.

In the Indian economy, what stands out is that growth in real GDP, which at factor cost accelerated to its fastest pace in 9 quarters in the June quarter.

According to a research report from UBS, unfortunately the proximate drivers of that acceleration appear to have faltered on the latest data.

Nonetheless, gains in lead indicators – specifically the PMIs and our own Lead Economic Indicator (LEI) – imply an acceleration in activity growth for FY 2015 as a whole.

UBS maintains its view that the pickup in growth will be gradual.

Although an acceleration in growth is welcome, more important for India's longer term prospects will be the continued effort to bring inflation lower.

Here’s more from UBS:

The acceleration in real GDP growth to 5.7% on the year was centred on two components: 'manufacturing' and 'community, social and personal services'.

With roughly equal contributions, these two sectors accounted for the 1.1ppt acceleration in year-on-year GDP growth from the March quarter.

Disappointingly, the high frequency indicators pertaining to each of these sectors slowed on the latest data.

Growth in the manufacturing production index fell to 1.8% yoy in June from 3.8% on average in April and May, while the core industries production index slowed to 2.6% yoy in July from 7.2% yoy in June.

Because, on a quarterly frequency, much of the data that goes into estimating community, social and personal services output relates to government expenditure, growth here should slow in line with the fiscal restraint that followed the jump in spending in April and May.

Lead indicators – PMIs and our own LEI – remain consistent with a moderate acceleration in GDP growth.

That suggests the recent slowing in manufacturing need not become a trend and other areas of the economy could accelerate – even in the context of ongoing fiscal and monetary policy restraint.

To be sure the relatively (compared to the PMI) more significant gain in our Leading Economic Index is due to financial variables – in particular the yield curve metrics – employed in the Index's aggregation.

The gains associated with the rise in financial market sentiment over the last twelve months combined with the easy base afforded by the 'taper tantrum' this time last year have made for some sharp gains in the LEI.

Without getting into the 'where now?' question for these financial market variables, we can say that the improvement in financial market sentiment is of direct positive relevance for the economy by way of sentiment, financing conditions and balance sheet or wealth effects.

However, the non-linear two-way relationship between financial variables and the real economy plus fiscal and monetary restraint, balance sheets, the poor monsoon and the latest production numbers keep us looking for only a moderate pick up in real GDP growth to 5.3% in FY2015.