1QFY2014 GDP | Economy

August 31, 2013

1QFY2014 GDP Growth

Real GDP growth at 4.4% in 1QFY2014, lowest in 4 years
Key highlights

Bhupali Gursale
022-3935 7800 Ext: 6820 bhupali.gursale@angelbroking.com

Real GDP growth for 1QFY2014 came in at 4.4% largely in line with market expectations, as compared to 4.8% in the previous quarter and 5.4% in 1QFY2013. The major disappointment comes from the 3.9% growth in trade, hotels, transport and communication category of the services sector reflecting the weak consumption sentiment. Growth in community, social and personal services picked up to 9.4% boosted by higher government spending but it is unlikely to be sustained going ahead. On the demand-side, GDP at market prices continued to decelerate to 2.4% as growth in private consumption slowed and investment as well as exports contracted during 1QFY2014. We believe that the liquidity tightening measures taken by the RBI to contain exchange rate volatility have further dampened consumption and investment sentiments and raised downside risks to growth. We continue to believe that the near-term outlook for growth is likely to remain challenging. We expect real GDP growth for FY2014 to range between 4.5-5.0%.

Trends in economic growth

Growth in agriculture and allied activities came in at 2.7% as against 1.4% in the previous quarter and 2.9% in 1QFY2013. It was boosted by production of coarse cereal, pulses and oilseeds during the rabi season while production of rice and wheat declined during the period. The industrial sector reported almost flat performance as compared to growth of 2.7% in 4QFY2013 and 1.8% in 1QFY2013. This can be attributed to the contraction in mining and manufacturing sector during the quarter. Regulatory issues plaguing the mining sector continued to result in a decline in production for the third straight quarter. Manufacturing sector witnessed a 1.2% de-growth despite a low base (1.0% contraction) during 1QFY2013. Growth in the services sector which contributes 60% share to GDP remained at 6.6%, similar to growth in the previous quarter. The major disappointment comes from the deceleration of growth in trade, hotels, transport and communication category. It contributes to more than one-fourth of the overall GDP and has slumped to 3.9% from the 6.1% in 1QFY2014. It clearly reflects the weakness in consumption sentiment. Growth in community, social and personal services picked up to 9.4%, the highest in 15 quarters on account of higher government spending. This can be corroborated with the double-digit growth in government final consumption expenditure during the period. We believe that growth in this component is unlikely to be sustained since the government is expected to curtail spending in order to meet its fiscal deficit target.

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1QFY2014 GDP | Economy

Exhibit 1: Trends in Real GDP growth (%,yoy)

FY2013 1Q2013 GDP at factor cost Agriculture and Allied Activities Industry Mining and Quarrying Manufacturing Electricity, Gas and Water Supply Construction Services Trade, Hotels, Transport & Communication Financing, Insurance, Real Estate & Business Services Community, Social & Personal Services
Source: MOSPI, Angel Research

FY2014 3Q2013 4.7 1.8 2.5 (0.7) 2.5 4.5 2.9 6.7 6.4 7.8 5.6 4Q2013 4.8 1.4 2.7 (3.1) 2.6 2.8 4.4 6.6 6.2 9.1 4.0 1Q2014 4.4 2.7 0.2 (2.8) (1.2) 3.7 2.8 6.6 3.9 8.9 9.4

2Q2013 5.2 1.7 1.3 1.7 0.1 3.2 3.1 7.6 6.8 8.3 8.4

5.4 2.9 1.8 0.4 (1.0) 6.2 7.0 7.7 6.1 9.3 8.9

Exhibit 2: Moderation in real GDP growth

(%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 Agriculture and Allied Activities Industry Services

Exhibit 3: Broad-based deceleration across sectors

(%) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Real GDP Agriculture Industry Services 5.4 4.4 2.9 2.7 1.8 0.2 1QFY2013 1QFY2014 7.7 6.6

Source: MOSPI, Angel Research

Source: MOSPI, Angel Research

Exhibit 4: Trends in real GDP from the supply and demand side
(%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 2QFY2012 3QFY2012 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014 2.4 4.4 Demand-side GDP Supply-side GDP

Source: MOSPI, Angel Research

August 31, 2013

1QFY2014 GDP | Economy

Demand-side GDP trends

GDP growth by expenditure has come in at a muted 2.4% during the quarter as compared to 3.0% in 4QFY2013 and 3.4% in 1QFY2013. The growth estimates reported by this approach are largely unreliable owing to discrepancy in data. But the sharper slowdown in demand-side of GDP indicates the support of subsidies in fuelling economic growth. Private final consumption expenditure has come in at a muted 1.6% as compared to 4.3% in 1QFY2013 reflecting weak consumer sentiment. But fiscal spending has led government final consumption expenditure to report growth of 10.5% as against 7.2% in 1QFY2013. Gross fixed capital formation contracted by 1.2% on the back of a 2.2% decline in 1QFY2013 reflecting the collapse in investment activity. Investment sentiment continues to remain weak due to regulatory delays and high interest rates coupled with the overhang of political uncertainty.

Exhibit 5: Dampening of consumption and investment sentiment

(%) 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 1QFY2010 3QFY2010 1QFY2011 3QFY2011 1QFY2012 3QFY2012 1QFY2013 3QFY2013 1QFY2014 Gross fixed capital formation Private final consumption expenditure

Source: MOSPI, Angel Research

Near-term outlook remains challenging

We continue to believe that the outlook for growth is likely to remain challenging. Our external sector vulnerability reflected in the INR depreciation has led to economic stability gaining precedence over growth. The silver lining is that agricultural growth is expected to gain momentum owing to a good monsoon. So far, the area under sowing for kharif crop has increased by 8.0% as compared to the corresponding period of the previous year. We believe that this is likely to boost rural consumption. However, the overall consumption and investment sentiments have dampened owing to tighter monetary conditions. Post the general election in 2014 greater policy certainty is likely to boost investment sentiment. Until then, a meaningful recovery in the capex cycle can be largely ruled out.

August 31, 2013

1QFY2014 GDP | Economy

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August 31, 2013

1QFY2014 GDP | Economy

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August 31, 2013