GDP measures indicate a cyclical recovery continues
Tue, 01 Dec 2015 11:02:50 -0700
India’s real GDP growth (market prices) rose to 7.4 per cent year-on-year in Q3 2015 from 7 per cent in Q2
TAGS: ECONOMY WATCH, GDP GROWTH, GVA, RURAL DEMAND, URBAN DEMAND
India's GDP (market prices) growth rose to 7.4 per cent year-on-year in third quarter of calendar 2015 from 7 per cent in second quarter, marginally above expectations. External demand remained weak, but domestic demand strengthened in Q3, led by a sharp pick-up in investment (public capex) and relatively steady private consumption growth.

Gross value added (GVA) growth also accelerated to 7.4 per cent in Q3 from 7.1 per cent in Q2, as industrial growth rose to a three-year high, led by manufacturing (9.3 per cent y-o-y) and utilities. However, services growth slowed and agriculture edged up slightly (2.1 per cent vs 1.9 per cent in Q2). The GDP deflator fell 1.3 per cent y-o-y in Q3 versus a rise of 1.7 per cent in Q2, largely reflecting ongoing WPI deflation. As a result, nominal GDP growth slowed to 6 per cent in Q3 versus 8.8 per cent in Q2, the lowest since the start of the new GDP series.

Overall, both GDP measures indicate a cyclical recovery and leading indicators (OECD’s index for India and high-frequency data) point to this recovery continuing.
We expect GDP growth to accelerate from 7.3 per cent in FY15 to 7.6 per cent y-o-y in FY16 and 7.8 per cent in FY17, owing to the positive impact of lower commodity prices, higher urban discretionary demand, accommodative monetary policy and higher public investment in infrastructure.

India’s real GDP growth (market prices) rose to 7.4 per cent year-on-year in Q3 2015 from 7 per cent in Q2, marginally above consensus expectations (Consensus: 7.3 per cent; Nomura: 7.4 per cent). External demand remained weak, but domestic demand strengthened in Q3.

Fixed investment growth accelerated to 6.8 per cent year-on-year from 4.9 per cent in Q2. In our view, this largely reflects higher public investment in infrastructure (nominal government capex rose 41 per cent year-on-year in Q2) as private investment remains weak owing to large unutilised capacity. Real private consumption growth moderated to a still-robust 6.8 per cent year-on-year (vs 7.4 per cent in Q2), likely reflecting subdued rural demand, which may have partly offset the pick-up visible in urban discretionary demand. Overall, domestic demand (private consumption, government consumption and fixed investment) strengthened to a nine-quarter high of 6.6 per cent in Q3 (up from 5.9 per cent in Q2). However, weak global demand continued to depress exports with net exports contributing negatively to growth (-0.4 pp in Q3 versus -0.2pp in Q2).

Meanwhile, gross value added (GVA) growth accelerated to 7.4 per cent in Q3 from 7.1 per cent in Q2 (Consensus: 7.3 per cent; Nomura: 7.5 per cent). Supply-side activity was supported by a pick-up industrial output growth (manufacturing and electricity), which accelerated to 8.3 per cent, the fastest in three years. In particular, manufacturing GVA growth rose to 9.3 per cent year-on-year in Q3, much faster than the 4.6 per cent rise in manufacturing output growth, which reflects improving corporate profitability. Finally, services output growth eased to 8 per cent vs 8.6 per cent in Q2, while agriculture growth inched up slightly to 2.1 per cent (from 1.9 per cent), despite weak monsoons, as output growth in livestock products, forestry and fishery (51 per cent of agriculture GVA) remain strong.

Importantly, the GDP deflator fell 1.3 per cent year-on-year in Q3 versus a 1.7 per cent rise in Q2, largely reflecting ongoing WPI deflation. A negative GDP deflator boosted real GDP growth rates in Q3. In fact, nominal GDP growth slowed to 6 per cent in Q3 versus 8.8 per cent in Q2, the lowest since the start of the new GDP series.

Overall, both GDP measures (market prices and value added) indicate a cyclical recovery, although the pace is being held back by weak rural demand (weak monsoons) and exports (slow global economy). Leading indicators point to this recovery continuing. The OECD’s composite leading index for India shows that the business cycle continued to improve in September, despite the global slowdown, with the index now close to trend. Early readings on high frequency data show that momentum in medium and heavy commercial vehicle production, passenger car sales, diesel consumption and electricity generation picked up in October.

In our baseline, we expect GDP growth to accelerate to 7.6 per cent year-on-year in FY16 (year ending March 2016) and to 7.8 per cent in FY17, from 7.3 per cent in FY15, owing to the positive impact of lower commodity prices on inflation and corporate profitability (reflected in improving manufacturing growth), improving urban discretionary demand, the gradual implementation of revived projects, an accommodative monetary policy (cumulative 125bp rate cut in 2015) and higher public investment in infrastructure. Additionally, the income boost from implementation of the seventh pay commission should provide further impetus to the consumption recovery (albeit at the cost of government-funded capex) in FY17. Rural demand and exports, though, are likely to remain a dampener for some time.
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