E
CO
S
COPE
Economic activity growth falls below 3% in February 2017
Investments decline ~5%, while consumption remains resilient
3 April 2017
The Economy Observer
India’s monthly economic activity index (EAI) grew 2.6% YoY in February 2017, marking its lowest growth in the past 14
months. For the third consecutive month, EAI growth was sub-4%.
A look at the components of EAI reveals that while consumption remained resilient in February 2017 (up 6.4% YoY),
sharp decline (of ~5%) in investments (driven by construction activities, auto sales and diesel consumption) and higher
trade deficit dragged EAI growth.
As expected, demonetization has hurt economic activity with some lag. Although there is no one-to-one correlation,
consistent weakness in EAI points to deceleration in 4QFY17 GDP growth.
A fresh record-fall in
construction activities,
continued decline in auto
sales and second fall in
diesel consumption drove
the weakness in
investments in February
2017
All components barring
petrol sales witnessed
slower growth in February
India’s economic activity growth eased to 2.6% YoY in February 2017…:
Our
preliminary estimates reveal that India’s EAI grew only 2.6% YoY in February
2017, marking the lowest growth in 14 months
(Exhibit 1).
Notably, this is the
third consecutive sub-4% growth
post-demonetization. A look at the sub-
components shows that while consumption growth remained resilient,
investments declined sharply in February
(Exhibit 2).
…driven by sharp decline in investments…:
As we mentioned last month,
demonetization has brought renewed weakness in investments, which declined
4.9% YoY in Februray, marking the third consecutive fall
(Exhibit 3).
A look at the
components of our Motilal Oswal leading indicator (MOLI) for investments
reveals that a fresh record-fall in construction activities, continued decline in
auto sales and second fall in diesel consumption drove the weakness in
investments in February 2017 (please see
Exhibit 7
for the heat map).
…and higher trade deficit:
Further, imports grew faster than exports (12.3% v/s
8.4%), leading to a widening of trade deficit
(Exhibit 4).
It deducted 0.3pp from
EAI growth in February 2017, lower than 0.9pp in the previous month.
Consumption, however, remained resilient in February:
Consumption index
grew 6.4% YoY in February 2017, slower than 6.9% in January but a decent
growth. A look at the components of consumption reveals that all components
barring petrol sales witnessed slower growth in February (please see
Exhibit 8
for the heat map). Passenger traffic actually declined for the second time in
three months
(Exhibit 5).
Consistent weakness in EAI to be reflected in 4QFY17 GDP growth:
Although
there is no one-to-one correlation between our EAI and official GDP growth due
to underlying differences discussed in our
earlier report,
our EAI has a very
strong correlation with real GDP (excluding discrepancies) estimates
(Exhibit 6).
Consequently, we expect real GDP growth to decelerate in 4QFY17.
Note: Estimates of Economic Activity Index (EAI) for the month prior to the recently concluded month are released
in the first few business days of every month. So, February’s EAI is released today.
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Madhurima Chowdhury
(Madhurima.Chowdhury@motilaloswal.com); +91 22 3982 5445
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 decelerates to
sub-3% in February 2017…
% YoY
12
9
6
3
0
Feb-16
May-16
Aug-16
Nov-16
Feb-17
Please refer to our earlier
report
for details
3mma
Economic Activity Index
Exhibit 2: …driven by renewed weakness in investments and
higher foreign trade deficit
Consumption
(pp)
2.5
4.5
(0.0)
1.1
3.2
(0.6)
4.8
(0.9)
(0.3)
Jan-17
4.4
(1.4)
(0.3)
Feb-17
Investment
Net exports
GDP
Feb-16
Dec-16
Shows contribution of different components to EAI’s growth
Exhibit 3: Motilal Oswal leading indicator (MOLI) for
investments declined 4.9% YoY in February 2017…
% YoY
10
5
0
(5)
(10)
Feb-16
May-16
Aug-16
Nov-16
Feb-17
3mma
MOLI: Investment
Exhibit 4: …and higher growth in imports than exports also
dragged EAI’s growth
28
14
0
(14)
(28)
(% YoY)
Exports
Imports
Exhibit 5: MOLI for consumption, however, remained
resilient in February
12
9
6
3
0
Feb-16
May-16
Aug-16
Nov-16
Feb-17
Source: CEIC, Various official sources, MOSL
Exhibit 6: Our composite EAI shares a very strong
correlation with real GDP growth
Composite EAI
13
10
6
3
0
Q3FY02
(% YoY)
Real GDP*
% YoY
3mma
MOLI: Consumption
Q3FY05
Q3FY08
Q3FY11
Q3FY14
Q3FY17
* Excluding discrepancies
4-quarter moving average
3 April 2017
2
 Motilal Oswal Financial Services
Exhibit 7: Key leading indicators for investment
% YoY
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
1
3
Cargo
1
traffic
3.7
0.9
1.0
0.8
4.0
(0.2)
(1.6)
1.0
2.8
7.2
4.7
1.5
2.3
Electricity
15.8
11.3
14.7
4.6
8.1
1.6
0.1
2.2
2.8
10.2
6.0
4.8
1.5
Industrial
credit
5.4
2.7
0.1
0.9
0.6
0.6
(0.2)
0.9
(1.7)
(3.4)
(4.3)
(5.1)
(5.2)
Auto
2
sales
24.7
21.4
25.4
21.4
7.7
1.0
5.0
1.1
8.3
(18.3)
(19.1)
(12.1)
(4.7)
4
Govt
3
capex
(44.9)
(52.9)
(20.5)
7.5
(24.4)
(18.7)
239.1
20.3
(165.7)
11.5
32.7
7.2
25.8
Diesel
sales
10.8
15.4
4.3
8.1
1.5
1.8
13.0
(11.4)
5.2
10.6
1.2
(7.8)
(3.8)
2
Capital
goods’
4
imports
18.7
6.3
(27.8)
(1.9)
1.7
(7.1)
(10.5)
(4.7)
7.7
(11.3)
5.1
1.8
(24.8)
Cement
Production
13.5
11.9
4.4
2.4
10.3
1.4
3.1
5.5
6.2
0.5
(8.7)
(13.3)
(15.8)
IIP: Non-
metallic
5
products
11.1
9.3
3.4
1.0
5.5
(0.7)
2.2
3.5
3.2
(0.7)
(9.2)
(11.4)
(15.1)
IIP: Capital
5
goods
(9.3)
(15.3)
(25.3)
(12.5)
(16.1)
(29.4)
(22.4)
(21.6)
(27.0)
15.0
(3.9)
10.7
5.3
Includes railways and waterways
Capital spending by central government
5
Our forecasts for February 2017
Include commercial vehicles and three-wheelers
Machinery & equipment, transport equipment, machine tools and project goods
Exhibit 8: Key leading indicators for consumption
% YoY
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
1
Currency
13.3
14.9
15.1
14.7
15.7
16.7
17.4
15.2
17.2
(23.6)
(39.9)
(37.8)
(30.3)
Auto
1
sales
11.0
10.0
19.8
9.3
10.9
14.0
24.9
21.4
8.1
(4.7)
(18.6)
(4.2)
1.3
Petrol
sales
12.9
21.5
11.9
13.6
4.4
14.7
24.9
(3.4)
13.8
14.3
7.9
(0.6)
3.1
Rural
2,7
wages
0.2
0.8
0.3
(0.2)
(0.2)
(1.0)
(0.2)
0.6
1.8
2.5
2.9
3.1
2.6
Passenger
3
traffic
4.8
(0.6)
0.2
1.5
(0.7)
1.1
2.3
0.4
(0.4)
7.3
(0.9)
1.0
(0.3)
Revenue
4
spending
2.5
23.9
12.5
30.0
43.6
(17.7)
1.6
33.1
52.7
15.9
(8.0)
33.0
22.0
2
Imports
(4.5)
(22.9)
(22.9)
(13.5)
(7.4)
(18.0)
(13.3)
0.0
8.5
9.5
0.3
10.6
21.8
5
Foreign
tourists
6
arrival
4.4
(1.1)
(0.3)
1.0
(1.2)
0.6
1.9
(0.1)
(0.9)
7.0
(1.5)
0.4
(0.7)
Consumer
durable
7
goods
10.4
10.1
11.8
5.9
5.4
5.8
2.1
13.9
0.6
9.4
(8.9)
2.9
1.9
Personal
credit
19.2
19.4
19.7
19.1
18.5
18.8
18.1
19.7
17.0
15.2
13.5
12.9
12.0
Includes passenger vehicles and two-wheelers
Real rural wages; deflated by CPI for rural workers
3
4
Railways and aviation
Excluding interest payments (only for central government)
5
Imports of agricultural items, leather products, newsprint and electronic goods, textiles (excluding gold, silver, precious metals)
7
6
In persons unit
Our forecasts for February 2017
Source: Various National Sources, CEIC, MoSL
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 April 2017
3
 Motilal Oswal Financial Services
Leading Indicators for consumption: Resilience continued in February 2017
Exhibit 9: Consumer auto sales rose for the first time in four
months in February 2017
(% YoY)
Auto sales#
Exhibit 10: Petrol consumption also moved back in positive
territory in February
(% YoY)
Petrol sales
1.3
3.1
# Includes passenger vehicles and two-wheelers
Exhibit 11: Real wages continued to pick up due to sharp fall
in inflation
Real rural wages
Exhibit 12: Passenger traffic growth continues to hover
around the horizontal axis
(% YoY)
Passenger traffic
2.6
(0.3)
(% YoY)
Feb-17 is our estimate
Deflated by CPI for rural workers
Railways + Aviation
Exhibit 13: Central government’s revenue spending grew
strongly…
Central government's core revenue spending
(% YoY)
Exhibit 14: …and consumption-based imports also increased
in the past few months
Consumption based imports
21.8
22.0
(% YoY)
Revenue spending excluding interest payments
Imports of agricultural items, leather products, newsprint and
electronic goods, textiles
3 April 2017
4
 Motilal Oswal Financial Services
Exhibit 15: Foreign tourists arrivals remained weak in
February 2017
(% YoY)
Foreign tourist arrivals
Exhibit 16: Production of consumer durable goods expected
to remain subdued in February
(% YoY)
IIP: Consumer durables
(0.7)
1.9
In persons
Feb-17 is our estimate
Exhibit 17: Personal credit growth has come-off sharply in
the past few months…
(% YoY)
Personal credit
Exhibit 18: …and PMI for services was just in the growth
territory (above 50)
56
52
(Index)
PMI: Services
50.3
12.0
48
44
40
An index of 50 implies no change
Exhibit 19: We expect consumer non-durable goods IIP to
move into positive territory…
(% YoY)
IIP: Consumer non-durable goods
Exhibit 20: …though food production IIP may continue to
decline
(% YoY)
IIP: Food products
2.1
(6.9)
Feb-17 is our estimate
Feb-17 is our estimate
3 April 2017
5
 Motilal Oswal Financial Services
Leading Indicators for investment: Witnessed renewed weakness
Exhibit 21: Cargo traffic growth has picked up…
(% YoY)
Cargo traffic
Exhibit 22: …while power generation growth weakened
(% YoY)
Electricity production
2.3
1.5
Railways + ports
Exhibit 23: Industrial credit posts a fresh record decline in
February 2017…
Industrial credit
Exhibit 24: …while industrial auto sales fell for the fourth
consecutive month
(% YoY)
Auto sales
(% YoY)
(5.2)
(4.7)
Include commercial vehicles and three-wheelers
Exhibit 25: Construction activity posts a fresh record decline
in February 2017…
(% YoY)
Construction
Exhibit 26: …but capital spending by central government
grew sharply
Central government's capital spending
25.8
(15.5)
(% YoY)
Cement production & IIP for Non-mineral metallic products (NMMP)
Feb-17 data for IIP: NMMP is our estimate
Source: CEIC, Various official sources, MOSL
3 April 2017
6
 Motilal Oswal Financial Services
Exhibit 27: Diesel sales fell again in February 2017…
(% YoY)
Diesel sales
Exhibit 28: …and imports of capital goods also down sharply
(% YoY)
Capital goods' imports
(3.8)
(24.8)
Machinery & equipment, transport equipment, machine tools and
project goods
Exhibit 29: Expect IIP for capital goods to remain into
positive territory…
(% YoY)
IIP: Capital goods
Exhibit 30: …and manufacturing PMI just moves into growth
zone (>50)
56
(Index)
Manufacturing PMI
5.3
54
52
50
48
46
50.7
Feb-17 is our estimate
An index of 50 implies no change
Exhibit 31: Cement production collapsed again in February…
(% YoY)
Cement production
Exhibit 32: …but we expect manufacturing IIP to pick up
(% YoY)
IIP: Manufacturing
2.1
(15.8)
Feb-17 is our estimate
3 April 2017
7
 Motilal Oswal Financial Services
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