E
CO
S
COPE
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,
Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Exhibit 1: India’s economic activity growth eased to sub-5%
YoY in December 2016
% YoY
13
10
8
5
3
0
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Please refer to our earlier
report
for details
3mma
Economic Activity Index
Exhibit 2: Composite EAI shares a very strong correlation
with real GDP (excl. discrepancy) growth
Consumption
(pp)
Investment
0.1
7.4
3.6
(1.0)
(2.3)
Dec-15
(0.7)
1.0
1.0
6.3
(1.3)
0.4
3.3
Net exports
GDP
Oct-16
Nov-16
Dec-16
Source: CEIC, Various official sources, MOSL
Exhibit 3: MOLI for consumption decelerated meaningfully
in December 2016…
12
9
6
3
0
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
% YoY
3mma
MOLI: Consumption
Exhibit 4: …while MOLI for investment posted second
consecutive growth in December
10
5
0
-5
-10
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Source: CEIC, Various official sources, MOSL
% YoY
3mma
MOLI: Investment
Exhibit 5: India’s economic activity grew 5.8% YoY in
3QFY17, better than 5% in 2QFY17…
(%, YoY)
9.6
9.2
6.1
4.0
2.2
3.8
4.5
3.5
4.7
7.0
Composite EAI
Exhibit 6: …driven by better consumption growth and a
revival in investments
Consumption
(pp)
Investment
Net exports
GDP
8.0
5.0
5.8
1.6
5.2
(0.7)
0.0
4.5
0.2
1.1
1.0
5.1
2.3
5.6
-0.1
2.0
4.6
-1.7
0.2
5.6
(0.1)
Q3FY14
Q2FY15
Q1FY16
Q4FY16
Q3FY17
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Source: CEIC, Various official sources, MOSL
3 February 2017
2
 Motilal Oswal Financial Services
Exhibit 7: Key leading indicators for consumption
% YoY
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Currency
12.5
13.3
14.9
15.1
14.7
15.7
16.7
17.4
15.2
17.2
(23.6)
(40.0)
Auto
1
sales
2.3
11.0
10.0
19.8
9.3
10.9
14.0
24.9
21.4
8.1
(4.7)
(18.6)
Petrol
sales
11.4
12.9
21.5
11.9
13.6
4.4
14.7
24.9
(3.4)
13.8
14.3
7.8
Rural
2
wages
(0.1)
0.2
0.8
0.3
(0.2)
(0.2)
(1.0)
(0.2)
0.6
1.8
2.5
2.6
7
Passenger
3
traffic
3.4
4.8
(0.6)
0.2
1.5
(0.7)
1.1
2.3
0.4
(0.4)
7.3
(1.0)
Revenue
4
spending
(0.1)
2.5
23.9
12.5
30.0
43.6
(17.7)
1.6
33.1
52.7
15.9
(8.0)
Imports
(10.5)
(4.5)
(22.9)
(23.1)
(13.7)
(7.4)
(18.9)
(14.2)
(2.5)
8.0
10.4
0.5
5
Foreign
tourists
6
arrival
3.0
4.4
(1.1)
(0.3)
1.0
(1.2)
0.6
1.9
(0.1)
(0.9)
7.0
(1.5)
Consumer
durable
goods
5.6
10.4
10.1
11.8
5.9
5.4
5.9
2.2
13.9
0.2
9.8
5.2
7
Personal
credit
18.1
19.2
19.4
19.7
19.1
18.5
18.8
18.1
19.7
17.0
15.2
13.5
QUARTERLY DATA
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
1
2
11.6
10.6
9.6
11.3
10.2
11.6
13.0
14.9
15.7
15.2
(40.0)
11.4
17.3
1.4
0.4
1.4
(0.3)
5.9
7.7
13.2
20.2
(3.6)
9.5
11.1
8.8
16.3
12.3
16.1
14.4
15.4
10.0
11.7
11.9
2.5
0.5
2.1
2.6
2.5
3.5
0.4
0.3
(0.0)
(0.2)
2.3
6.7
(5.9)
(4.6)
(3.8)
(8.2)
2.9
1.5
2.4
0.3
1.3
1.9
2.6
6.4
18.8
1.4
1.4
1.2
(1.7)
11.6
27.9
5.8
18.7
(6.3)
10.3
8.4
(13.4)
(11.8)
(15.3)
(19.0)
(13.3)
(14.7)
(12.2)
6.1
6.7
(6.3)
(4.9)
(4.2)
(8.7)
2.6
1.1
2.0
(0.1)
0.8
1.5
(9.5)
(15.5)
(20.9)
(4.7)
3.7
11.9
23.2
8.7
7.8
7.4
4.9
15.3
13.5
12.9
15.5
17.1
18.0
18.5
19.4
18.5
19.7
13.5
Includes passenger vehicles and two-wheelers
Real rural wages; deflated by CPI for rural workers
3
Railways and aviation
4
Excluding interest payments (only for central government)
5
Imports of agricultural items, leather products, newsprint and electronic goods, textiles (excluding gold, silver, precious metals)
6
In persons unit
7
Our forecasts for December 2016
Worse than previous month and a year ago
Better than the previous month but worse than a year ago
Worse than the previous month but better than a year ago
Better than previous month and a year ago
3 February 2017
3
 Motilal Oswal Financial Services
Exhibit 8: Key leading indicators for investments
% YoY
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Cargo
1
traffic
1.9
3.9
1.1
1.0
0.8
4.0
(0.2)
(1.6)
1.0
2.8
7.2
4.7
Electricity
6.0
9.2
11.3
14.7
4.6
8.1
1.6
0.1
2.2
2.8
10.2
6.0
Industrial
credit
5.6
5.4
2.7
0.1
0.9
0.6
0.6
(0.2)
0.9
(1.7)
(3.4)
(4.3)
Auto
2
sales
15.0
24.7
21.4
25.4
21.4
7.7
1.0
5.0
1.1
8.3
(18.3)
(19.1)
Govt
3
capex
647.0
(44.9)
(52.9)
(20.5)
7.5
(24.4)
(18.7)
239.1
20.3
(165.7)
11.5
32.7
Diesel
sales
7.9
10.8
15.4
4.3
8.1
1.5
1.8
13.0
(11.3)
5.1
10.6
1.0
Capital
goods’
4
imports
(8.2)
18.7
6.3
(27.8)
(1.9)
1.7
(7.1)
(10.5)
(4.7)
7.7
(11.3)
5.1
Cement
production
9.0
13.5
11.9
4.4
2.4
10.3
1.4
3.1
5.5
6.2
0.5
(8.7)
IIP: Non-
metallic
products
6.3
11.1
9.3
3.4
1.0
5.5
(0.7)
2.2
2.8
3.2
(0.7)
(5.5)
5
IIP: Capital
goods
(21.6)
(9.3)
(15.3)
(25.3)
(12.5)
(16.1)
(29.5)
(22.1)
(21.6)
(25.9)
15.0
11.6
5
QUARTERLY DATA
% YoY
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
1
2
Cargo
1
traffic
4.2
4.0
6.8
2.5
2.8
2.3
0.3
2.1
1.9
(0.3)
4.9
Electricity
11.3
9.5
9.4
3.7
2.3
6.8
9.5
8.8
9.0
1.3
6.2
Industrial
2
Auto sales Govt capex Diesel sales
credit
11.3
7.9
7.4
6.0
5.3
4.9
4.8
4.6
0.6
0.4
(3.1)
(5.3)
8.3
5.7
3.0
(0.6)
(1.8)
9.6
20.4
17.5
2.3
(9.1)
(8.6)
16.4
(32.4)
92.2
17.6
41.1
43.3
(15.3)
(16.4)
23.5
(23.1)
0.3
2.6
1.1
2.2
3.6
8.0
7.5
11.4
4.7
0.8
5.5
Capital
goods’
4
imports
(13.4)
(10.5)
6.0
2.8
6.9
0.5
(9.6)
5.7
(10.1)
(7.4)
0.6
Cement
Production
9.6
9.9
4.2
(0.5)
1.4
1.6
4.8
11.4
5.7
3.3
(0.8)
IIP: Non-
metallic
products
7.6
5.5
1.4
(3.9)
(2.9)
(1.1)
1.6
8.9
3.3
1.4
(1.1)
IIP: Capital
goods
13.6
(0.5)
3.2
9.9
2.0
13.4
(9.5)
(15.5)
(18.0)
(24.5)
(3.0)
Includes railways and waterways
Include commercial vehicles and three-wheelers
3
Capital spending by central government
4
Machinery & equipment, transport equipment, machine tools and project goods
5
Our forecasts for December 2016
Source: Various National Sources, CEIC, MoSL
Worse than previous quarter and a year ago
Better than the previous quarter but worse than a year ago
Worse than the previous quarter but better than a year ago
Better than previous quarter and a year ago
3 February 2017
4
 Motilal Oswal Financial Services
Leading Indicators for consumption
Exhibit 9: Auto sales fell again in December 2016
(% YoY)
Auto sales#
Exhibit 10: Petrol consumption was growing stably
(% YoY)
Petrol sales
7.8
(18.6)
# Includes passenger vehicles and two-wheelers
Exhibit 11: Real wages have picked up due to lower inflation
Real rural wages
Exhibit 12: Passenger traffic growth normalized in December
(% YoY)
Passenger traffic
2.6
(1.0)
(% YoY)
Dec-16 is our estimate
Deflated by CPI for rural workers
Railways + Aviation
Exhibit 13: Central government’s revenue spending declined
in December
Central government's core revenue spending
(% YoY)
Exhibit 14: Consumption-based imports picked up in the
past few months
Consumption based imports
0.5
(8.0)
(% YoY)
Revenue spending excluding interest payments
Imports of agricultural items, leather products, newsprint and
electronic goods, textiles
3 February 2017
5
 Motilal Oswal Financial Services
Exhibit 15: Demonetization hurt foreign tourists in
December 2016
(% YoY)
Foreign tourist arrivals
Exhibit 16: Production of consumer durable goods expected
to have picked up in December
(% YoY)
IIP: Consumer durables
(1.5)
5.2
In persons
Dec-16 is our estimate
Exhibit 17: Personal credit growth witnessed a sharp
deceleration in December
(% YoY)
Personal credit
Exhibit 18: …and PMI for services contracted (below 50) for
the second consecutive month in December
56
52
48
(Index)
PMI: Services
13.5
44
40
46.8
An index of 50 implies no change
Exhibit 19: We expect consumer non-durable goods IIP to
stay in positive territory…
(% YoY)
IIP: Consumer non-durable goods
Exhibit 20: …and food production IIP likely to get a boost
due to favorable base
(% YoY)
IIP: Food products
9.0
1.5
Nov-16 is our estimate
Dec-16 is our estimate
3 February 2017
6
 Motilal Oswal Financial Services
Leading Indicators for investment
Exhibit 21: Cargo traffic growth pick-up sustained in
December…
(% YoY)
Cargo traffic
Exhibit 22: …and power generation growth was also decent
in December
(% YoY)
Electricity production
4.7
6.0
Railways + ports
Source: CEIC, Various official sources, MOSL
Exhibit 23: Industrial production declined for the third
consecutive month…
Industrial credit
Exhibit 24: …while auto sales witnessed a sharp contraction
for second consecutive month in December 2016
(% YoY)
Auto sales
(% YoY)
(4.3)
(19.1)
Include commercial vehicles and three-wheelers
Exhibit 25: Construction activity declined at the fastest pace
since 2001…
(% YoY)
Construction
Exhibit 26: …but capital spending by central government
picked up in December
Central government's capital spending
32.7
(7.2)
(% YoY)
Cement production & IIP for Non-mineral metallic products (NMMP)
Dec-16 data for IIP: NMMP is our estimate
Source: CEIC, Various official sources, MOSL
3 February 2017
7
 Motilal Oswal Financial Services
Exhibit 27: Diesel sales growth also weakened in
December…
(% YoY)
Diesel sales
Exhibit 28: …but imports of capital goods also picked up in
December
(% YoY)
Capital goods' imports
1.0
5.1
Machinery & equipment, transport equipment, machine tools and
project goods
Exhibit 29: Expect IIP for capital goods to post second
successive double-digit growth in December…
(% YoY)
IIP: Capital goods
Exhibit 30: …though manufacturing PMI contracted in
December 2016
56
54
52
50
48
46
(Index)
Manufacturing PMI
11.6
49.6
Dec-16 is our estimate
An index of 50 implies no change
Exhibit 31: Cement production dropped sharply in
December…
(% YoY)
Cement production
Exhibit 32: …and we expect manufacturing IIP to grow
decently again in December
(% YoY)
IIP: Manufacturing
3.8
(8.7)
Dec-16 is our estimate
3 February 2017
8
 Motilal Oswal Financial Services
NOTES
3 February 2017
9
 Motilal Oswal Financial Services
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Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412
Pending Regulatory inspections against Motilal Oswal Securities Limited:
SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold inquiry and
adjudge violation of SEBI Regulations; MOSL replied to the Show Cause Notice whereby SEBI granted us an opportunity of Inspection of Documents. Since all the documents requested by us were not covered we have requested to
SEBI vide our letter dated June 23, 2015 to provide pending list of documents for inspection.
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indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive
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Analyst ownership of the stock
Served as an officer, director or employee
Companies where there is interest
No
No
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Regional Disclosures (outside India)
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For Hong Kong:
This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures
Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has
an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to
SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities,
products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in
Hong Kong.
For U.S
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a
registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the
absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This
document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be
engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by
the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal
Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore,
may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the
Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
Office Address:21 (Suite 31),16 CollyerQuay,Singapore 04931
3 February 2017
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd
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