Has India’s Recovery Hit a Wall?

The economic recovery of India has officially hit a wall in the third quarter. Industrial activity has lost steam thanks to monsoon rains hitting agricultural output. This will be confirmed Friday when India releases its gross domestic product (GDP) on Friday.

India is Asia’s third largest economy and its GDP has been decelerating. Between July and September the economy grew at five to 5.2 percent. This is down from the 5.7 percent growth in the months prior. There are definite signs their economy has hit a soft patch. We are expecting that data will show industrial output to slow down sharply to one percent in the third quarter. This is an annual reading. The previous quarter came in at 4.4 percent. Agricultural output has also come to an abrupt halt. This number should also come in at one percent, down from the previous quarter print at 3.8 percent.

Looking at the service sector, this the lone bright spot as it is expected to come in at seven percent. This is up from the previous quarter’s number of 6.6 percent. This is coming from strong support from the transport and construction sectors

The Growth Slowdown will be Temporary

The GDP will slow in the third quarter but it will not stop the overall recovery and growth to come in at over six percent in 2015. This will come thanks to economic reforms and government investment into infrastructure. As these measures take hold growth will return. There is much hope thanks to the Prime Minister Narendra Modi took office in May. This has been seen in India’s benchmark bourse the Sensex which has rallied some 30 percent. This has made it the outperformer of Asia in 2014.

The economic fundamentals of India are improving. They are being helped by lower commodity prices and other economic reforms. These have helped put the country’s growth on a more sustainable track. We are hoping that the winter government session that runs from November 24 to December 23 will enact even more reforms and measures to help solidify growth potential. There are a total of 37 bills up for discussion including raising the investment ceiling for foreign investment as well as changes to the land acquisition act. We will also hope for reforms to the goods and service taxes.

All of these will be key progress from Modi’s reform agenda. They are all integral cogs in the helping to sustain growth in the financial markets.