07 FEB 2013

Eco Update

GDP ESTIMATES
ECONOMY

Growth bottoms out; sclerotic recovery ahead

Indias FY14 GDP growth has been estimated at 4.9% YoY by the CSO in its advance estimates due to a sharp fall in Manufacturing which is slated to degrow by 0.2%. This is in line with our expectation of ~4.8% and makes it two consecutive years of sub-5% growth something India has not seen in a decade. Importantly, this reading, which is just a tad higher than 4.5% revised growth number for FY13, is despite a stellar show from Agriculture (4.6% YoY) and backward revision in GDP data that has added nearly Rs 280bn to GDP. Moreover, FCNR deposit led push to deposit growth, is likely to nudge Banking and Insurance segment growth higher and mask a broader slowdown in services. Net Exports the only savior: Viewed from expenditure side, the picture is uglier with all segments showing a degrowth except net exports. Net Exports were the main driver of growth contributing ~3.5% to overall GDP growth. Export pick up contributed ~75 bps, while shrinking imports imparted a 270 bps push to GDP. Adjusted for net exports, growth would have been barely ~1%.

Net exports to the rescue in FY14

Contribution to GDP growth (%) GDP by exp (Real) PFCE GFCE GCF Net exports Discrepencies
Source: CSO

FY13 4.7 3.0 0.7 0.9 (1.0) 1.1

FY14E 4.6 2.5 0.6 (0.0) 2.5 (1.0)

chg in bps (10) (51) (6) (95) 346 (203)

Growth bottomed out but scelerotic recovery in FY15

We retain our GDP estimate at ~5.3% for FY15 given the huge electoral uncertainty and weak underlying growth trends. The 5%+ estimate largely owes to a sustained uptick in exports and lagged effect of a bumper food output on rural demand. We expect growth to remain below trend and output gap to remain mildly negative. While growth has bottomed out, recovery will be sclerotic and will be hostage to uncertainties related to national elections which could cast a shadow on fiscal and policy reforms; entrenchment of inflation expectations; and a disorderly adjustment of portfolio flows due to tapering of U.S QE. Going forward, we expect growth mix to remain consumption-led despite signs of a modest uptick in Investment helped by recent policy activism: Agriculture and Exports key to FY15 growth: We expect the lagged effect of a bumper Rabi crop to sustain rural demand. Export growth momentum, based on improved US growth outlook and stability in Eurozone will be the other key driver. However the pace of growth will be gradual and acceleration will depend on monsoon and global growth trajectories. Capex recovery to be delayed: Weak corporate and bank balance sheets, huge uncertainty over govt policy, high debt levels and persistence of high interest rates will remain a big impediment. More importantly, states are the primary venues of political contests now. All the key reforms require state participation hence even a new government may take a while to reverse the decline. However, there is some optimism on capex which is discernible from anecdotal evidence and owes to government activism seen lately. Domestic revenue of capital goods companies (ex BHEL) picked up after six consecutive quarters of negative growth which could be attributed to pre-election rush to complete Infrastructure projects. Order inflow growth (~25%) and margins surprised driven by rationalization of costs and rising exports (better pricing due to INR depreciation). It is however, too early to call it a trend given the sensitivity of capex to policy action.

Key risks to call: The general elections will throw up a new government but it remains to be seen whether it can break the political knot that has constrained Indias economic potential . A stable and effective govt holds the key to sustained revival of business confidence and investment. Progress in reducing supply-side constraints (esp. electricity, infrastructure and agriculture) will be the key to not just investments but also in preventing entrenchment of inflation expectations. However, domestic demand may run ahead of prospects of real growth recovery, exacerbating pressure on inflation and CAD, if there is a positive change at the Centre post May 2014. In this context, we will watch out for the role of RBI given its inflation targeting mode.
Sachchidanand Shukla Sr VP & Economist
sachchidanand.shukla@axiscap.in 91 22 4325 1108 01

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07 FEB 2013

Eco Update

GDP ESTIMATES
ECONOMY

Data takeaways
GDP by expenditure:
Net Exports were the main drivers contributing ~3.5% to overall growth. Export pick up contributed ~75 bps while shrinking imports imparted a 270 bps push to GDP, clearly showcasing the impact of currency depreciation. Private consumption growth more than halved at 4.1% since FY11 and the share of PFCE is seen rising to 59.8% of GDP (60.1% in FY13).PFCE contributed a negative 51 bps to growth. Gross fixed capital expenditure growth has come to a grinding halt at 0 from nearly 15 % in just 4 years flat! However, its contribution to growth remained largely unchanged at ~60 bps. Valuables (accounting for gold) are seen degrowing by 4% vs a growth of 36% last fiscal. Inventory accumulation has also risen to 1.8%YoY and bodes ill for early resumption in output.

GDP by activity:
Agriculture growth is likely to spurt to 4.6% vs 1.4% in FY13 helped by bountiful rainfall and record food grain output. Industry is barely likely to grow at 0.7% vs 1% YoY% in the previous year, as manufacturing and mining are estimated to degrow by -0.2% and -1.9% respectively. Electricity and Construction (aided by higher steel output) segments are expected to grow at 6% (vs 2.3% in FY13) and 1.7% (vs downwardly revised 1.1%) respectively. Services sector is likely to grow 6.9% vs 7% last fiscal helped by Financing, insurance, real estate (growth of 11.2% YoY vs 10.9%), and Community social and personal services (growth of 7.4% vs 5.3%) with slightly higher YoY spending by the government, which is expected to slow down sharply in the last quarter. Importantly, Trade, hotels, transport and communication, the largest sub segment of GDP, grew at 3.5% (vs 5.1%) indicating the persisting broader slowdown in services segment. Government spending or government final expenditure is also seen slowing to 5.5% vs 6.2% despite slightly higher YoY spending seen thus far. However, Community social and personal services (growth of 7.4% vs 5.3%) shows that government spending, is still playing a fairly big part in supporting the growth momentum.

A note on GDP Revisions

The CSO revised GDP estimates of the year 2011-12 stated as 6.2% to 6.7% now due to lower manufacturing sector growth. For FY13, the growth rate has been revised downwards to 4.5% from the earlier stated 5% due to slower growth in Mining, Manufacturing and Agriculture. This revision has shaved off nearly Rs 283 bn from GDP in FY13 and has created a favourable base for FY14 and partially mitigates the adverse impact on GDP from sharp expenditure cuts in Q4.

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07 Feb 2013

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07 FEB 2013

Eco Update

GDP ESTIMATES
ECONOMY

Note, GDP data for a fiscal undergoes three rounds of revisions; and the process takes three years. The Second Revised Estimate uses the Annual Survey of Industries (ASI) findings in place of the Quick Estimates of IIP. ASI data is considered more comprehensive and accurate than IIP data but comes with a lag of ~20 months. However, the IIP has been consistently underestimating Indias industrial output and the variation between the IIP and the ASI has increased since 2005-06 making comparisons difficult.

Exhibit 1: Annual growth rate comparison

(Y oY % ) Econ om ic act ivit y Agriculture Industry Services Exp e n dit u r e PFCE GFCE GFCF Ove r al l GDP
Source: CSO

FY 0 6 5.1 9.7 10.9 8.6 8.9 16.2 9 .5

FY 0 7 4.2 12.2 10.1 8.5 3.8 13.8 9 .6

FY 0 8 5.8 9.7 10.3 9.4 9.6 16.2 9 .3

FY 0 9 0.1 4.4 10.0 7.2 10.4 3.5 6 .7

FY 1 0 0.8 9.2 10.5 7.4 13.9 7.7 8 .6

FY 1 1 8.6 7.6 9.7 8.7 5.8 11.0 8 .9

FY 1 2 5.0 7.8 6.6 9.3 6.9 12.3 6 .7

FY 1 3 1.4 1.0 7.0 5.0 6.2 0.8 4 .5

FY 1 4 E 4.6 0.7 6.9 4.1 5.5 0.2 4 .9

Exhibit 2: Contribution to growth by activity

Agri wt 18.5 Industry wt 19.7 Services wt 61.8

Exhibit 3: GDP at factor cost & market prices

22

12
10 8

GDP FC (YoY%) (YoY%)

GDP MP (YoY%)

(YoY %)

19 16 13
10

6
4 2

0
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14E

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Source: CSO

Source: CSO

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07 Feb 2013

Mar-14E

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07 FEB 2013

Eco Update

GDP ESTIMATES
ECONOMY

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