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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,
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