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GDP growth to pick-up pace in Q3 and Q4?

Monday, September 04, 2017
By Dominic Rebello

The Indian economy in the first quarter of the 2017-18 grew at the slowest pace in 5 years. The Q1 2017-18 GDP came in at 5.7%, a marked decline from the 7.9% growth in the first quarter last fiscal. The economic performance in the quarter gone by was also the lowest in the last 12 quarters. Crucially, the government has revised down gross value added (GVA) growth for the fourth quarter of last fiscal by 50 basis points (bps) to 5.6%, suggesting that the impact of demonetisation on the economy was more than earlier estimated.

In the first quarter, real GDP growth slid to 5.7% from 6.1% in the same quarter last fiscal. The slowdown corroborates with corporate results for the first quarter, which had shown net profits declining for the chunk of listed firms, says CRISIL Research. According to it “The computation of GDP relies heavily on corporate data from the Ministry of Corporate Affairs database. The slowdown reflects a sharp deceleration in exports of goods and some moderation in consumption growth.”

Data readings

  • GVA growth, or the supply-side GDP, which is supposed to be a truer estimate of underlying economic activity as it doesn’t take into account the impact of taxes and subsidies, grew 5.6% in the first quarter, same as in the fourth quarter of last fiscal, but down from 7.9% on-year. The fact that GVA growth in the first quarter was the same as in the fourth quarter suggests waning demonetisation impact was offset by rising anxiety over the Goods & Services Tax (GST).
  • Industrial growth in the first quarter was down to 1.6% compared with 3.1% in the previous quarter, on account of a sharp slowdown in manufacturing growth (1.2% vs 5.3%) and de-growth in mining (-0.7% vs 6.4%). The former was arguably on account of GST uncertainty, which leads to destocking by retailers and slowdown in the production process.
  • Agricultural growth in real terms, too, slowed to 2.3% from 5.2% in the fourth quarter. Here, it is important to note that despite a real growth of 2.3%, nominal agricultural growth was only 0.3%, suggesting that while agricultural output grew, their prices fell. Real growth is derived by stripping the price impact from nominal growth. Services sector growth, however, anchored overall GVA growth, rising 8.7% from 7.2% on-year driven by improvement in two sectors — trade, hotels, transport & communication, and financial, real estate and professional services. The latter reflected some pick- up in consumer credit in the banking system in the first quarter.
  • The headline real GDP (which measures the expenditure or the demand side) growth came in at 5.7% – slowest in the past thirteen quarters – from 6.1% in the fourth quarter, and from 7.9% a year back. The difference in GDP and GVA growth is net product taxes. So given that GDP growth at 5.7% is only 10 bps more than the GVA growth of 5.6%, claims of real tax gains from enlarging tax base after demonetisation seems a too-early conclusion. However, this may see pick up going ahead as the government firms up its accounting exercise. Another noteworthy point is that despite moderation in growth in most demand-side components – private consumption, government consumption, exports – the unusually high growth (205% on-year) in valuables supported overall growth. The latter could be attributed to large gold purchases in anticipation of GST. There was also a mild improvement in investment growth (to 1.6% vs 2.1%, year-on-year) which pulled up the share of fixed investments to 29.8% from 28.5%. This may be reflective of optimism in the growth recovery in the second half.

CARE Rating Outlook
We have revised our GDP projection lower for 2017-18 to 7.1-7.3% from our earlier projection of 7.6-7.8%. The implementation of GST could help iron out the operational bottlenecks for businesses leading to growth in the remaining 3 quarters of 2017-18. Domestic economic progress in 2017-18 is to be led by infrastructure.

Crisil Outlook
In an environment of subdued global growth and week investments, India’s GDP cannot grow fast in the short run. For fiscal 2018 as a whole, we are in the process of revising down of our GDP growth forecast down from 7.4% stated earlier. Thant said, normal monsoon, softer interest rates and inflation, and pent-up demand (demand postponed due to the demonetisation) will support consumption growth in the remaining quarters. There will also be a mild push to consumption from budgetary announcements.

Emkay Outlook
We believe, once the effect of demonetization & GST fades out in Q2FY18 and with multiplier effect of government’s reflationary approach the GDP is likely to accelerate in H2FY18. The growth is likely to be from consumption with trade deficit continued to drag the overall growth. Capital formation is likely to remain nonchalant with lower state government expenditure and slackness in private investment activity.

SBI Outlook
We believe GDP growth in current fiscal will remain weak. Q2 GDP numbers are likely to be closer to Q1. We however see, GDP growth picking up pace in Q3 and in Q4 the growth is likely to cross 7%. We are hopeful of a better Q4, but that is crucially dependent on outcome of resolution of stressed assets that falls due in Q4.

Nomura Outlook
We expect GDP growth to average 7.4% y-o-y in H2 2017, vs. 5.9% in H1, supported by (1) higher consumption on the back of remonetisation and state pay commission hikes; (2) restocking as GST-related uncertainties are resolved and; (3) lagged effects of lower lending rates especially on consumption. As such, we expect growth to pick up, but remain uneven and to be largely led by consumption and services. Given the lower Q2 print, we are revising our full-year forecast to 6.7% for 2017 (vs. 6.9% earlier), before it accelerates to 7.8% in 2018 (vs. 7.7% earlier). In fiscal-year terms, we expect GDP growth at 7.1% in FY18 (year ending March 2018), unchanged from FY17.

Kotak Economic Research Outlook
We believe growth has likely bottomed out in 1QFY18. We expect the economy to gradually show signs of recovery on the back of continued remonetization, expected restocking, easy financial conditions and improving rural demand from higher wages and good monsoons. But there are enough lingering factors which may keep overall FY2018 outlook sober: (1) possibly lower general government expenditure growth, (2) GST-led transient disruptions, (3) sluggish urban wage growth, (4) lack of private sector investment growth amid excess slack and overleveraged corporate balance sheet and (5) relatively weak external sector dynamics. We maintain our FY2018 real GVA growth estimate at 6.8% and maintain a watch on the extent of buoyancy across sectors in 2QFY18 for any downward revisions to our estimates

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