HSBC India Watch

HSBC in their India Watch report have slightly raised GDP growth forecast,

At 9.4% in 2006/07, Indian GDP growth was the strongest since 1988/89 and the second biggest fiscal year expansion since the series began 1950/51. Not bad and not a million miles away from the 10.9% growth rate achieved by China over the same period. The January-March quarter saw year-on-year growth of 9.1%, down from a high of 10.2% in fiscal Q2 and lower than China’s 11.1%. But this is hardly cause for gloom. Excluding agriculture, GDP growth has softened from 11.6% to 10.3% over the same period.

As usual, we have created our own seasonally adjusted estimates of GDP and its
components in order to gain a better idea of what is happening in underlying terms. These suggest that GDP rose by 2.5% in the latest quarter (non-annualised), up from 1.8% in fiscal Q3. We estimate that the economy grew by an annualised 8.5% in the last six months compared with the previous six months, down from a high of 10.5% in the final two quarters of the previous fiscal year.

As such, while there is some suggestion that GDP growth has passed its cyclical peak it is hardly resounding as yet and the bottom line as far as we are concerned is that the economy continues to grow in excess of its sustainable rate. If this is right then it is likely to mean that evidence of overheating will persist, notwithstanding the on-going drop in wholesale price inflation. It is worth noting that the GDP deflator
jumped to 6.2% in the January-March quarter, up from 5.5% in fiscal Q3. It is the highest number for eight years.

Looking ahead, we expect growth to continue to soften modestly in underlying terms as the impact of the rate rises feeds through. It is important to bear in mind that the pace ofmonetary tightening was stepped up only over the last six months, while one would normally expect interest rate changes to take a year to 18 months be fully felt. Indeed, we have decided to revise up our 2007/08 GDP growth forecast, albeit slightly, to 8% from 7.8% previously