Rating company advises 'care' over reading too much into Q1 data, says GDP growth due to 'social sector spend'

Sep 02 2014, 21:29 IST
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The ratings agency said that the FY2014-15 growth is estimated at 5.2-5.5 per cent. (Reuters) The ratings agency said that the FY2014-15 growth is estimated at 5.2-5.5 per cent. (Reuters)
SummaryEven as the Indian stock markets continue to cheer higher-than-expected GDP data...
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Even as the Indian stock markets continue to cheer the higher-than-expected GDP data, Care Ratings today advised caution as the economy has moved up due to social sector spend, which causes fiscal strain.

The ratings agency said that the FY2014-15 growth is estimated at 5.2-5.5 per cent.

"The current optimism needs to be viewed with caution ... while growth has been robust in Q1, sustaining it at this level would be a challenge," it said in a note here.

The official data released last week pointed to a surprising 5.7 per cent growth in the April-June period. The GDP expansion, the highest in nearly two years, boosted the investor sentiment and propelled equity markets to new highs.

The government spends on the social sector, visible through growth in "community, social and personal services", was a key driver for the Q1 GDP number, the rating outfit said, adding with the fiscal situation being where it is, the expansion is unlikely to be sustained.

"With the commitment to a 4.1 per cent fiscal deficit, there is little room for substantial contribution from this end (social sector) for the remainder of the year," it said.

Additionally, the poor monsoon, which has resulted in a 3.2 per cent dip in the sown area for the summer crops, will also drag the growth down, Care said and highlighted its impact on inflation.

"Inflation continues to be a problem, especially on the food side. This means the Reserve Bank will not be lowering rates any time soon."

The base effect coming from a low growth last year will, however, pull up the GDP expansion rate during the current fiscal, it said.

"As the low base effect will persist in the next two quarters, there is room for optimism this year. We expect GDP growth in the range of 5.2-5.5 per cent for FY15," Care said.

The latest forecast comes a day after analysts and brokerages upwardly revised their FY15 estimates, with some pegging it even at 5.8 per cent.

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