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Demonetization hurts economic activity in December 2016
3QFY17 growth, however, improved to 5.8% from 5.0% in previous quarter
3 February 2017
The Economy Observer
Despite a very favorable base (0.1% growth in December 2015), our monthly economic activity index (EAI) suggests that
India’s growth eased from 6.3% YoY in November to a three-month lowest level of 4.9% YoY in December 2016.
Demonetization seems to have hurt economic growth in December 2016. Consumption grew at the slowest pace in 16
months (+4.7% YoY v/s 8.5% in November), while a sharp decline in construction activities led to a fall in investments
growth from 3.7% to 1.4% in December.
However, economic growth improved from 5% YoY in 2QFY17 to 5.8% in 3QFY17, primarily due to higher growth in
consumption (private + government) and some revival in investments.
Consumption grew at the
slowest pace in 16 months
in December 2016 (+4.7%
YoY v/s 8.5% in November)
Lower growth in
investments was
attributable to worst
contraction in construction
activities since 2001
Although economic growth
weakened in December
2016, better growth in the
previous two months led to
growth of 5.8% YoY in
3QFY17, better than 5% in
2QFY17
India’s economic activity growth eased to sub-5% in December 2016…:
Our
preliminary estimates reveal that despite a very favorable base (0.1% growth in
December 2015), India’s EAI grew only 4.9% YoY in December 2016, much lower
than 6.8% and 6.3% in
October
and
November
2016, respectively
(Exhibit 1).
Since our composite EAI is arrived at using three separate leading monthly
indices (consumption, investment and trade), we believe it is important to look
at the performance of these drivers
(Exhibit 2).
…as consumption growth eased to 16-month low…:
A look at the components
of our Motilal Oswal leading indicator (MOLI) for consumption reveals that 18-
month highest decline in passenger traffic (railways + aviation) and 5-month
highest drop in the central government’s core revenue spending (see
Exhibit 7
for the heat map) led to a consumption growth fall from 8.5% YoY in November
2016 to a 16-month lowest level of 4.7%
(Exhibit 3).
…and investments growth softened:
Our MOLI for investments shows a
deceleration from 3.7% YoY in November to 1.4% in December 2016
(Exhibit 4).
Lower growth was attributable to the worst contraction in construction
activities since 2001, as reflected by a 190-month worst fall in cement
production and a 34-month highest decline in auto sales, partly offset by decent
growth in cargo traffic, power generation and capital goods production (see
Exhibit 8
for the heat map).
However, 3QFY17 was better than 2QFY17…:
Although economic growth
weakened in December 2016, better growth in the previous two months led to
growth of 5.8% YoY in 3QFY17, better than 5% in 2QFY17
(Exhibit 5).
It was
primarily due to an improvement in consumption and some revival in
investments
(Exhibit 6).
…which may get reflected in 3QFY17 GDP growth:
As we had detailed in our
earlier report,
our EAI has a very strong correlation with the official real GDP
(excluding discrepancies) estimates. Thus, as the Economic Survey 2016-17
pointed out, GDP data may underestimate the actual impact of demonetization.
Note: Estimates of EAI for the month prior to the recently concluded month will be released in the first few
business days of every month. In line with this, we release December EAI today.
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
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