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Economic activity growth recovers in Dec’18

However, expect GDP growth to weaken to ~6.5% in 3QFY19

* Our in-house Economic Activity Index (EAI) for India’s real GDP (called EAI-GDP) showed a growth of 6.5% YoY in Dec’18, vis-à-vis 13-month slowest growth of 2.3% YoY in Nov’18. EAI-GDP growth averaged ~5% in 3QFY19, much lower than 6.5% in 2QFY19 and ~8.5% in 1QFY19.

* The month-on-month (MoM) acceleration in our EAI-GDP was almost entirely due to consumption, which was supported by ~21% YoY growth in fiscal spending. Investments, on the other hand, posted sub-1% YoY growth for the second consecutive month in Dec’18.

* EAI-GVA index grew at 14-month slowest pace of 6.5% YoY in Dec’18, broadly unchanged from Nov’18. Weaker GVA growth was led by 8-month slowest growth in the services sector.

* Overall, weaker growth in 3QFY19 was on expected lines as the favorable base has faded. We had earlier forecasted that real GDP growth will weaken further to ~6.5% in 3QFY19 — implying ~7% growth in FY19 – lower than the market consensus and the RBI’s projection of ~7.4%. But, the recently released revised data for FY16-18 has created some uncertainty in our predictions, as the new 1HFY19 data (and quarterly data for FY18) will be published this month-end.

* EAI-GDP growth weakened sharply in 3QFY19…:

Preliminary estimates reveal that India’s Economic Activity Index (EAI) for GDP grew ~6.5% YoY in Dec’18, recovering from 13-month lowest growth of 2.3% YoY in Nov’18 (Exhibit 1). It implies that EAI-GDP grew 5.1% in 3QFY19, much weaker than 6.4% in 2QFY19 and 8.1% in 1QFY19. Better growth (MoM basis) was almost entirely driven by consumption (which, in turn, was primarily supported by fiscal spending), as investments grew only 1% in Dec’18 (Exhibit 2).

* …and EAI-GVA growth was stable at low rate:

EAI-GVA growth, on the other hand, was unchanged at 14-month slowest pace of 6.5% YoY in Dec’18. It implies 5-quarter slowest growth of 7.5% in 3QFY19 v/s 9% growth in 2QFY19 (Exhibit 3). A look at the key components reveals that weaker growth was primarily driven by the services sector, which grew at 7-month slowest pace of 7.4% YoY in Dec’18 (Exhibit 4). Agriculture sector growth also slowed down to 3- month slowest pace of 2.7% YoY in Dec’18

* Strong fiscal spending revived consumption growth in Dec’18…:

After posting 20-month lowest growth of 4% YoY in Nov’18 (Exhibit 5), consumption growth doubled to 8% in Dec’18, supported by 21.2% growth in central government’s core revenue spending (excluding interest payments). Private consumption spending also grew at a faster pace, even as petrol sales (10% YoY) and passenger traffic (3.3%) grew at a decent pace (Exhibit 11 for the heat map).

* …while investments growth remained very weak:

Investment spending, on the other hand, grew only 1% YoY in Dec’18, following 0.4% growth in Nov’18 (Exhibit 6). Weak investments were driven by 28-month slowest growth in cargo traffic, the 7-month weakest growth in power generation, and first contraction in commercial auto sales in 18 months (Exhibit 12 for the heat map). Continuation of strong growth (7.3% YoY) in construction activities, notwithstanding the unfavorable base, was a positive surprise. Moreover, as external trade narrowed in Dec’18, it added 0.5pp to EAI-GDP growth in Dec’18, marking its first addition in seven months.

* Services sector led to moderation in EAI-GVA in Dec’18:

EAI-GVA growth was unchanged at 14-month slowest pace of 6.5% YoY in Dec’18, implying moderation from 9% growth in 2QFY19 to 7.5% in 3QFY19 (Exhibit 7-8). The 7- month slowest growth of 7.4% YoY in the services sector was the key driver of moderation in EAI-GVA, led by a decline in auto sales and very weak cargo traffic (Exhibit 13-14 for the heat map).

*Expect 3QFY19 real GDP to moderate further towards 6.4%:

As expected, with the fading of favorable base from Nov’17, economic activity growth has weakened. Our EAI-GDP grew 5.1% YoY in 3QFY19, much weaker than 6.4% in 2QFY19 and 8.1% in 1QFY19. The last time EAI-GDP posted ~5% growth was in 2QFY18, when official real GDP clocked 6.3% growth. We, thus, continue to believe that real GDP growth could moderate further from 7.1% in 2QFY19 to ~6.4% in 3QFY19. Though there is no one-to-one correlation between our EAIs and official GDP/GVA due to underlying differences, our composite indices move in sync with the official real GDP (ex-discrepancies) and real GVA estimates (Exhibit 9-10). The recently released revised data for FY16-18, however, has created a sense of uncertainty in our predictions, as new 1HFY19 data (and quarterly data for FY18) will be published this month-end.

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