Economic activity weakened in October 2017
Investments stagnated and net imports widened
* India’s monthly economic activity index (EAI) grew at 2.1% YoY in October 2017, the slowest in four months. The average growth in 2QFY18 was 5% YoY. High base and continued decline in fiscal spending led to the weaker growth.
* While the deceleration was broad-based, stagnancy in investments – driven primarily by renewed weakness in construction activities and imports of capital goods – was the key driver of slower headline growth. As exports contracted for the first time in 15 months, net imports also acted as a serious drag on EAI growth.
* Consumption index grew decently at ~5% YoY in October 2017, driven by 11-month high growth in passenger traffic. Fiscal spending, however, contracted for the second consecutive month.
* Overall, we believe that real GVA growth could fall below 6% again in 3QFY18 before recovering to ~6.5% in 4QFY18. It implies real GDP growth of ~6% in 3Q and ~7% in 4QFY18.
* India’s economic activity slowed sharply in October 2017…: Preliminary estimates reveal that India’s economic activity grew only 2.1% YoY in October 2017, marking its slowest growth in four months (Exhibit 1). A look at subcomponents shows that while the deceleration was broad-based, weak investments and higher net imports dragged EAI growth in October (Exhibit 2).
* …driven by stagnancy in investments and net imports: As against an average growth of ~5% in 2QFY18, leading indicators confirm that investments stagnated in October 2017 (Exhibit 3). A look at key components reveals that construction activities declined again in October 2017, along with imports of capital goods, which drove down growth in investments (Exhibit 8 for the heat map). Further, while exports contracted for the first time in 15 months, imports grew decently, due to which net imports acted as a significant drag on EAI growth in October 2017 (Exhibit 4).
* Consumption, however, grew decently: Our index for consumption activity, on the other hand, grew 4.8% YoY in October 2017, slower than in September but similar to the growth in previous months (Exhibit 5). Details confirm that it was primarily driven by fiscal spending (revenue spending less interest payments), which declined for the second consecutive month in October 2017. Passenger traffic, however, grew at the highest pace in 11 months (see Exhibit 7 for the heat map).
* Expect real GDP to grow ~6% YoY in 3QFY18: Overall, economic activity witnessed a broad-based weakness in October 2017, as the index grew only 2.1% versus ~5% in 2QFY18. Although there is no one-to-one correlation between our EAI and official GDP due to underlying differences, our EAI moves in sync with real GDP (ex-discrepancies) estimates (Exhibit 6). Accordingly, we expect real GVA to grow at sub-6% again in 3QFY18, which implies real GDP growth of 6.1%, down from 6.3% in 2QFY18.
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