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Economic activity weakened in October 2017
Investments stagnated and net imports widened
4 December 2017
The Economy Observer
India’s monthly economic activity index (EAI) grew at 2.1% YoY in October 2017, the slowest in four months. The
average growth in 2QFY18 was 5% YoY. High base and continued decline in fiscal spending led to the weaker growth.
While the deceleration was broad-based, stagnancy in investments – driven primarily by renewed weakness in
construction activities and imports of capital goods – was the key driver of slower headline growth. As exports
contracted for the first time in 15 months, net imports also acted as a serious drag on EAI growth.
Consumption index grew decently at ~5% YoY in October 2017, driven by 11-month high growth in passenger traffic.
Fiscal spending, however, contracted for the second consecutive month.
Overall, we believe that real GVA growth could fall below 6% again in 3QFY18 before recovering to ~6.5% in 4QFY18. It
implies real GDP growth of ~6% in 3Q and ~7% in 4QFY18.
Preliminary estimates
reveal that economic
activity grew only 2.1% YoY
in October 2017, marking its
slowest growth in four
months
We expect real GVA to grow
sub-6% again in 3QFY18,
which implies real GDP
growth of 6.1%, down from
6.3% in 2QFY18
India’s economic activity slowed sharply in October 2017…:
Preliminary
estimates reveal that India’s economic activity grew only 2.1% YoY in October
2017, marking its slowest growth in four months
(Exhibit 1).
A look at sub-
components shows that while the deceleration was broad-based, weak
investments and higher net imports dragged EAI growth in October
(Exhibit 2).
…driven by stagnancy in investments and net imports:
As against an average
growth of ~5% in 2QFY18, leading indicators confirm that investments stagnated
in October 2017
(Exhibit 3).
A look at key components reveals that construction
activities declined again in October 2017, along with imports of capital goods,
which drove down growth in investments
(Exhibit 8
for the heat map). Further,
while exports contracted for the first time in 15 months, imports grew decently,
due to which net imports acted as a significant drag on EAI growth in October
2017
(Exhibit 4).
Consumption, however, grew decently:
Our index for consumption activity, on
the other hand, grew 4.8% YoY in October 2017, slower than in September but
similar to the growth in previous months
(Exhibit 5).
Details confirm that it was
primarily driven by fiscal spending (revenue spending
less
interest payments),
which declined for the second consecutive month in October 2017. Passenger
traffic, however, grew at the highest pace in 11 months (see
Exhibit 7
for the
heat map).
Expect real GDP to grow ~6% YoY in 3QFY18:
Overall, economic activity
witnessed a broad-based weakness in October 2017, as the index grew only
2.1% versus ~5% in 2QFY18. Although there is no one-to-one correlation
between our EAI and official GDP due to
underlying differences,
our EAI moves
in sync with real GDP (ex-discrepancies) estimates
(Exhibit 6).
Accordingly, we
expect real GVA to grow at sub-6% again in 3QFY18, which implies real GDP
growth of 6.1%, down from 6.3% in 2QFY18.
Note: Preliminary estimates of Economic Activity Index (EAI) for the month prior to the recently concluded month
are released in the first 1-2 business days of every month. So, October’s EAI is released today.
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Rahul Agrawal
– Research Analyst
(Rahul.Agrawal@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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