India's Q3 growth likely to come in above 7 pct, Q4 GDP to suffer on demonetization

The third quarter economic growth of India is expected to breach the 7 percent waterline, wile gross domestic product in the last quarter of the year will suffer a temporary setback, owing to effects of demonetization.

Agricultural output likely got a hand on the back of a normal monsoon, with the sector likely up 3 percent y/y, from 2.1 percent in 1Q-2Q. Industrial activity also rose but was weighed at the margin by slower industrial production. Q3 industrial production contracted -0.8 percent, compared to 0.7 percent quarter before, dragged by broad slowdown across sectors, especially manufacturing. Consumer goods fared better but capital goods output plunged sharply.

Alongside IP, the performance of listed companies will also determine GDP manufacturing. Falling borrowing costs, moderate inflation and improving urban demand were supportive of earnings, before entering a soft patch in the Dec quarter. Services sector output stayed in the driver’s seat, supported by nonfinancial services and public administration spending.

"We expect gross-value added and real GDP growth to stay above the 7 percent waterline, at 7.2 percent y/y, against 7.3 percent previous quarter and 7.5 percent, compared to 7.1 percent respectively," DBS commented in its latest research report.

Further, a jump in public capex investments from the quarter before likely compensated for trailing private sector participation. In rupee terms, Sep quarter exports recovered while imports stayed in red, suggesting a positive drift to headline GDP.

Meanwhile, a modest improvement is likely to follow in 1Q17 before stabilizing into FY17/18 on easing cash shortage, pent-up demand and higher public capex spending, the report noted.