Expect 2QFY19 real GDP growth to moderate to 7.0-7.2%
Fiscal spending accelerates while investments weaken
* As per our in-house economic activity index (EAI) for India, real GDP grew only 4.7% YoY in Sept’18, partly owing to an unfavorable base. It implies ~6.5% YoY growth in 2QFY19, much weaker than 8.2% growth in 1QFY19.
* The month-on-month (MoM) deceleration in our EAI-GDP was broad-based - private consumption, investments and net exports dragged EAI-GDP growth, which were partially offset by ~25% YoY growth in fiscal spending. Owing partly to the base effect, investment growth moderated to 5.8% YoY in Sept’18 after ten consecutive months of double-digit growth.
* Like EAI-GDP, our EAI-GVA index also grew at a slower pace of ~7% YoY in Sept’18. While power and construction activities grew faster, all other major sectors – agriculture, manufacturing and services – witnessed moderation.
* Overall, we believe that real GDP/GVA growth moderated from 9-quarter high of 8.2% YoY in 1QFY19 towards 7.0-7.2% in 2QFY19. Considering favorable base is fading and the probable slowdown in NBFCs credit growth, we expect growth to moderate further to ~6.5% YoY in 2HFY19, implying ~7% growth in FY19, lower than the RBI’s projection of ~7.5%.
* EAI-GDP growth weakened sharply in September 2018…:
Preliminary estimates reveal that India’s economic activity index (EAI) for GDP grew only 4.7% YoY in September 2018, marking the slowest growth in the past 11 months (Exhibit 1). It implies that EAI-GDP growth averaged ~6.5% YoY in 2QFY19, much slower than 8.2% in 1QFY19. Slower growth was broad based – private consumption, investments and net exports weakened in Sept’18 and 2QFY19, which were partly offset by higher fiscal spending (Exhibit 2). At least a part of this slowdown is because of the base effect – 8% YoY growth in Sept’18 v/s an average growth of 3% in the previous ten months (Nov’16-Aug’17).
* …and EAI-GVA also moderated:
Like EAI-GDP, EAI-GVA growth also moderated from ~9% YoY in Aug’18 to 7% in Sept’18 (Exhibit 3 on the next page). A look at key components reveal that while power and construction activities grew faster, all other major sectors – agriculture, manufacturing and services – witnessed moderation.
* Fiscal spending supported consumption…:
Consumption spending grew decently at 7.5% YoY in Sept’18, similar to the average growth of 7.2% in the past 10 months. Sharp acceleration in core revenue spending of the central government– up 25.6% YoY – helped consumption growth. Although production of consumer durable goods is also expected to grow faster due to a very low base, other sub-components such as fuel consumption, passenger traffic and rural wages grew slowly. (Exhibit 5and Exhibit 11 for the heat map).
* …while investment spending moderated sharply in Sep’18/2QFY19:
Fading of the base effect, however, is clearly visible in investments activities, which grew only 5.8% YoY in Sept’18, after ten consecutive months of double-digit growth (Exhibit 6). Most of the sub-components such as diesel sales (declined for the first time in 11 months), cargo traffic and industrial auto sales moderated in Sept’18/2QFY19. On the other hand, electricity production and construction sector continued to grow strongly (Exhibit 12 for the heat map). Moreover, external trade subtracted 2.4pp from EAI-GDP growth in September –the highest drag in 11 months.
* Broad-based weakness hurt real GVA growth also:
Lower rainfall, a decline in tractor sales, a decline in industrial fuel consumption, 11-month slowest growth in real bank credit to the trade sector and 6-month slowest growth in freight traffic – such broad-based deceleration contributed to weaker EAI-GVA growth in Sept’18 (Exhibit 13-14 for the heat map). Although industrial sector growth weakened to 6.7% (Exhibit 7), power and construction activities grew strongly. Further, services sector growth also moderated in Sept’18.
* Expect 2QFY19 real GDP to moderate to 7-7.2%:
Overall, as the base effect starts fading, the cracks in GDP/GVA growth are also apparent. We believe that real GDP growth would moderate from its 9-quarter high of 8.2% YoY in 1QFY19 towards 7.0-7.2% in 2QFY19. 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). Considering the strengthening of unfavorable base and probable slowdown in NBFCs credit growth, we expect real growth to moderate further to ~6.5% YoY in 2HFY19, implying ~7% growth in FY19. This stands against the RBI’s projection and market consensus of ~7.5%.
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