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Indias Q2FY17 GDP growth was below estimates at 7.3% compared with
7.1% in Q1FY17. The deceleration is largely a result of subdued investment
spending, lower manufacturing and services activity while agriculture has
been a saviour due to normal monsoon. A part of the reason for lower
growth can be attributed to higher deflator. While Q2 growth was below
estimate, we have reduced our H2FY17 growth estimate to 6.4% (7.8% earlier)
a resultant of a sharp consumption slowdown due to the demonetization
exercise. We believe currency circulation will improve in Q4FY17, leading
to a bounce-back in GDP growth to 7.6% in FY18 from 6.9% in FY17.
Highlights
Q2 GDP growth was
below estimate at 7.3%
Investment demand
remains weak,
government spending
increased the most
We expect GDP to grow
at 6.9% in FY17
Q2FY17 GDP at 7.3%: GDP growth was below estimates on the back of
negative surprise in manufacturing at 7.1% (9.1% in Q1FY17), trade, hotels,
transport etc. at 7.1% (8.1% in Q1FY17) and financial services etc. at 8.2%
(9.4% in Q1FY17). The dip in these sectors can be explained by higher
deflator. For instance, the deflator for manufacturing increased to 2.3% in
Q2FY17 from 1.1% in Q1FY17, for trade, hotels etc. it increased to 3.5% from
1.2% in the previous quarter and for financial services etc. it increased to
3.7% from 1.2%. On a sectoral basis while agriculture growth improved to
3.3% in Q2FY17 from 1.8% in Q1FY17 on the back of normal monsoon,
industrial growth dipped to 5.2% in Q2FY17 (6% in Q1FY17) and services
growth dipped to 8.9% (9.6% in Q1FY17).
Investment demand remains subdued: While private consumption showed
some pick-up in Q2FY17 at 7.6% from 6.7% in Q1FY17, investment demand
weakened at (-) 5.6% in Q2FY17 compared with (-) 3.1% in Q1FY17.
Government consumption remained robust at 15.2% versus 18.8% in Q1FY17
on the back of government spending on account Pay Commission related
hikes and public capital formation. Exports seem to have decelerated at
0.3% in Q2FY17 from 3.2% in Q1FY17. Imports fell much more sharply thus
aiding overall GDP growth.
Demonetisation implications for growth: Prior to the demonetisation of
Rs500 and Rs1000 notes, we believed that consumption would be the key
driver of growth in FY17 on the back of a good monsoon and Pay
Commission awards. Investment was expected to remain a drag and
improve only with a lag. The construct has changed with as much as
Rs16trn worth of currency now being demonetised leading to severe
shortage of currency and thus expected to lead to a dip in consumption
demand. As of 27 November 2016, only 15.6% of the demonetised currency
has been replaced in the form of withdrawals and exchange and thus is
likely to impinge on consumption. Hence, we expect consumption demand
to fall in November and December and revive in Q4FY17 only after
circulation of currency is restored.
Sameer Narang
sameer.narang@idfcbank.com
+91-22-7132 5632
Indranil Pan
indranil.pan@idfcbank.com
+91-22-7132 5631
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DATA RELEASE
GDP
GDP
Exhibit 1: Growth estimates revised lower
H2FY17
FY17
FY18
(% change)
Q1
Q2
Q3
Q4
Old
New
Old
New
Old
New
1.8
3.3
3.5
3.5
3.3
3.5
2.7
3.0
2.5
2.5
Industry
Mining and quarrying
6.0
5.2
3.7
4.6
7.0
4.2
6.5
4.9
7.0
6.5
-0.4
-1.5
2.0
2.0
3.5
2.0
2.4
0.5
3.5
3.3
9.1
7.1
5.0
6.0
8.8
5.5
8.8
6.8
8.5
7.9
9.4
3.5
4.5
5.5
7.3
5.0
7.8
5.7
6.5
6.8
Manufacturing
Electricity, gas, water supply and other utility
services
Construction
1.5
3.5
1.5
2.5
4.5
2.0
2.9
2.3
5.0
4.5
9.6
8.9
8.3
8.2
9.2
8.2
9.4
8.8
9.5
9.5
8.1
7.1
6.5
8.0
9.8
7.3
9.5
7.4
10.0
9.4
9.4
8.2
10.5
9.5
10.5
10.0
10.1
9.4
11.0
10.8
Services
Trade, hotels, transport, communication &
services related to broadcasting
12.3
12.5
7.5
6.5
6.3
7.0
8.1
9.7
6.3
7.5
7.3
7.1
6.0
6.3
7.4
6.1
7.5
6.7
7.7
7.5
GDP
7.1
7.3
6.2
6.6
7.8
6.4
7.6
6.9
7.8
7.6
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
2.0
-1.0
2.3
1.8
3.3
Industry
6.3
8.6
7.9
6.0
5.2
5.0
7.1
8.6
-0.4
-1.5
Manufacturing
9.2
11.5
9.3
9.1
7.1
7.5
5.6
9.3
9.4
3.5
Construction
0.8
4.6
4.5
1.5
3.5
Services
9.0
9.1
8.7
9.6
8.9
6.7
9.2
9.9
8.1
7.1
11.9
10.5
9.1
9.4
8.2
6.9
7.2
6.4
12.3
12.5
7.3
6.9
7.4
7.3
7.1
Q1FY17
Q2FY17
Q2FY16
Q3FY16
Q4FY16
6.3
8.2
8.3
6.7
7.6
3.3
3.0
2.9
18.8
15.2
9.7
1.2
-1.9
-3.1
-5.6
5.4
7.7
5.6
7.1
4.7
-47.0
Valuables
12.4
13.5
-17.2
-48.7
Exports
-4.3
-8.9
-1.9
3.2
0.3
Less Imports
-0.6
-6.4
-1.6
-5.8
-9.0
-80.6
266.2
378.4
3,347.0
-576.6
7.6
7.2
7.9
7.1
7.3
Discrepancies
GDP
30 November 2016
GDP
Exhibit 4: GVA growth to normalize only in FY18
(% change)
Weight (%)
FY13
FY14
FY15
FY16
FY17
15.4
1.5
4.2
-0.2
1.2
3.0
2.5
Industry
31.3
3.6
5.0
5.9
7.4
4.9
6.5
3.1
-0.5
3.0
10.8
7.4
0.5
3.3
17.5
6.0
5.6
5.5
9.3
6.8
7.9
FY18
2.2
2.8
4.7
8.0
6.6
5.7
6.8
Construction
8.5
0.6
4.6
4.4
3.9
2.3
4.5
Services
53.4
8.1
7.8
10.3
8.9
8.8
9.5
19.2
9.7
7.8
9.8
9.0
7.4
9.4
21.6
9.5
10.1
10.6
10.3
9.4
10.8
12.6
4.1
4.5
10.7
6.6
9.7
7.5
100.0
5.4
6.3
7.1
7.2
6.7
7.5
5.6
6.6
7.2
7.6
6.9
7.6
30 November 2016
GDP
30 November 2016