F

UEL

R

E

NGINES

8 December 2017

F

RIEND

O

F

T

HE

E

CONOMY

Indian economy witnessing much-needed twin transition

1HFY18 GDP growth, though slower, driven by highly sustainable factors

2QFY18 GDP growth –

released last week

– witnessed some very interesting trends, which, if sustained for a few more

quarters, could set the stage for sustainable growth in the economy. Our analysis reveals that while private spending

(consumption + investments) grew at the fastest pace in three years in 2QFY18, fiscal spending (center + state governments)

grew at the slowest pace in 13 quarters. Moreover, fiscal capex declined for the first time in 11 quarters in 2QFY18. The latter

confirms that

fiscal policy is reaching its limits

in providing support to domestic economic recovery. Almost the entire growth

in 1HFY18 was driven by private spending, which was offset by rising trade deficit. These trends, if sustained beyond FY18,

bode well for the much-needed twin transition we have been talking about in the last two years (a)

GDP growth shifting from

consumption-driven to investment-led,

and (b) the private (households + corporate) sector taking the mantle from the

government in driving investment growth. Since we expect the transition to continue in 2HFY18 as well, we expect real GDP

growth also to remain muted – average 6.6% YoY in 2HFY18 versus 6% in 1HFY18.

The wide gap between

consumption and

investments has narrowed

considerably in 1HFY18

Some exciting details about 2QFY18 GDP growth:

The credibility of India’s

GVA/GDP numbers is doubted for one reason or the other. The Central Statistics

Office (CSO), the agency responsible for publishing India’s national accounts

statistics, believes that GVA estimation is more robust than GDP data, and thus, the

former is the basis for headline GDP growth. This is in stark contrast to the

international practice, wherein headline GDP is estimated from its components

(consumption, investments and external trade), which also explains the existence of

highly volatile ‘discrepancies’ in India’s GDP estimates. Nevertheless, the

components of quarterly GDP – consumption and investments – provide useful

information about the key domestic activities in the economy. From its recent peak

of 8% in FY16, real GDP growth has weakened to 6% in 1HFY18

(Exhibit 1).

However,

a look at the trends in consumption and investments reveals that the wide gap

between the two economic activities has narrowed considerably in 1HFY18. While

consumption (private + government) grew 10.5% in FY17, investments (GFCF +

change in stocks) grew only 2.6%. In 2QFY18, however, while consumption growth

slowed to 6%, investments grew 4.8%

(Exhibit 2).

We expect investments to grow

faster than consumption in 2HFY18.

Exhibit 2: However, the driver of growth has shifted from

consumption to investments

16

12

7.1

6.0

8

4

0

(4)

Consumption*

(% YoY)

Investments#

Exhibit 1: India’s real GDP growth has weakened

considerably in the past two years

(% YoY)

7.5

6.4

5.5

Real GDP

8.0

FY13

FY14

FY15

FY16

FY17

1HFY18

(8)

Q2 FY14

Q2 FY15

Q2 FY16

Q2 FY17

Q2 FY18

Source: Central Statistics Office (CSO), MOSL

* Private + Government

# GFCF + change in stocks

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, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Private v/s fiscal investments:

Though the quarterly GDP data provides total

investment estimates, we have made an attempt to separate government

investments using capital expenditure (excluding loans & advances) of the central

and state governments. Using these estimates, we arrive at private (households +

corporate sector) investments. Thus, we can get an idea of the contribution of the

(general) government to total investments in the economy. Notably, due to limited

data availability, it is not possible for us to separate public corporate sector from our

loosely-called private investments.

Our estimates reveal that

fiscal investments declined

(in YoY terms) for the first

time in 2QFY18, while

private investments grew at

the fastest pace in 13

quarters

Government’s capex declined for the first time in 11 quarters:

Our estimates reveal

that fiscal investments declined (in YoY terms) for the first time in 11 quarters in

2QFY18, while private investments grew at the fastest pace in 13 quarters

(Exhibit

3).

The key reason for the fall in fiscal capex was state governments –

discussed

here,

as their combined capital expenditure declined for the second consecutive

quarter in 2QFY18

(Exhibit 4).

Investments by the central government continued to

grow, albeit much slowly, in 2QFY18.

The share of the general government (center + states) in total investments,

consequently, has fallen from 10.5% of total investments in 1HFY17 to 10.3% in

1HFY18

(Exhibit 5).

While the share of central government increased from 3.9% of

total investments in 1HFY17 to 5.1% in 1HFY18, this was more than offset by lower

share of the states.

Exhibit 3: Private capex picked up in 2QFY18, while fiscal

capex# declined for the first time in 11 quarters

40

30

20

10

0

(10)

(20)

2QFY15

2QFY16

2QFY17

2QFY18

# Capital spending of center and states excluding loans & advances

Private

(% YoY)

Government

Exhibit 4: Second consecutive quarterly decline in states

drove a decline in fiscal capex# in 2QFY18

150

100

50

0

(50)

2QFY15

2QFY16

2QFY17

2QFY18

Source: CSO, Comptroller and Auditor General of India (CAG),

Controller General of Accounts (CGA), RBI, CEIC, MOSL

Center

(% YoY)

States*

Exhibit 5: Share of general government has increased

consistently in total investments

(%)

Center

States*

Exhibit 6: Contribution of private and fiscal investments in

total investments in the past few years and 1HFY18

Private

10

(per cent points)

8.2

8

0.8

5.6

6

4

2

7.4

2.9

2.7

Government

Total

8.5

0.7

5.5

3.6

3.0

3.7

3.4

4.1

4.5

4.7

6.6

5.2

1.8

1.9

(0.1)

FY17

7.9

4.2

3.6

3.9

5.1

0

(2)

FY15

FY16

1HFY12 1HFY13 1HFY14 1HFY15 1HFY16 1HFY17 1HFY18

* Data for all states estimated from data availability of 16 states

8 December 2017

1HFY18

Source: CSO, CAG, CGA, RBI, CEIC, MOSL

2

Real investments of the

private sector grew 10.6%

YoY in 2QFY18, after three

consecutive declines

Private investments, however, picked up sharply in FY18:

Though fiscal capex

declined for the first time in 11 quarter in 2QFY18, real investments of the private

sector grew 10.5% YoY in 2QFY18, marking highest growth in 13 quarters

(Exhibit 3).

With favorable base effect kicking in, we expect private investments to continue to

grow faster in 2HFY18.

Accordingly, as

exhibit 6

shows, private investments were the key driver of higher

growth in total investments in 1HFY18, and 2QFY18 in particular. As against very a

marginal decline of 0.1% YoY in FY17, private investments have grown 8.8% YoY in

1HFY18, when total investments have grown at 8.5%.

Fiscal policy has indeed reached its limits:

Not only fiscal investments, but fiscal

consumption spending has already slowed significantly in 1HFY18 in general, and

2QFY18 in particular. This is broadly in line with our belief that

fiscal policy has

reached limits

in FY18. Using the break-up of total investments in private and

(general) government, we can estimate the contribution of domestic private and

fiscal (general government) spending (consumption + investment) to real GDP

growth.

In our notes released in

April 2017

and then in

May 2017,

we were very clear (and

way ahead of the market participants) that weak fiscal spending and a trend reversal

in net exports of goods & services will lead to a drag in real GDP growth this year.

For the first time in almost

three years, private

spending growth outpaced

fiscal spending in 2QFY18

For the first time in almost three years, private spending growth outpaced fiscal

spending in 2QFY18

(Exhibit 7).

While private spending grew ~8% YoY in 2QFY18 –

the highest growth in 10 quarters, government spending grew only 1.9% – the

slowest growth in 13 quarters. Consequently, the contribution of the (general)

government sector to real GDP growth fell from 2.6 percentage points (pp) in FY17

to 1.5pp in 1HFY18 and only 0.3pp in 2QFY18

(Exhibit 8).

Further, after adding to real GDP growth for four consecutive years, net exports

deducted about 2pp from real GDP growth in 1HFY18. This is also consistent with a

pick-up in private spending, which generally is more import-intensive in nature.

Exhibit 7: Private spending@ outpaced fiscal spending@ for

the first time in almost three years

30

20

10

0

(10)

(20)

Q2 FY13

Private spending

(% YoY)

Government spending

Exhibit 8: Contribution to real GDP growth by private and

government spending@

10

8

6

4

2

0

(2)

(4)

Private

Government

0.2

1.3

6.2

Net exports

Discrepancies

0.5

2.6

4.8

1.4

6.2

(2.0)

(per cent points)

0.4

4.8

(0.2)

4.4

0.5

2.2

0.2

1.4

4.3

Q2 FY14

Q2 FY15

Q2 FY16

Q2 FY17

Q2 FY18

FY13

FY14

FY15

FY16

FY17

1HFY18

@ consumption + investments

Source: CSO, RBI, CEIC, MOSL

8 December 2017

3

India witnessing much-needed twin transition:

Over the first two quarters of FY18,

although real GDP growth has slowed sharply – from 8% in FY16 to 6% in 1HFY18,

the drivers of growth have been more sustainable. The economy seems to be going

through much-needed (and inevitable) twin transition of (a) GDP growth shifting

from consumption-driven to investment-led, and (b) the private (households +

corporate) sector taking the mantle from the government in driving investment

growth.

Since we expect the

transition to continue in

2HFY18 also, we expect real

GDP growth also to remain

muted – average 6.6% YoY

in 2HFY18 versus 6% in

1HFY18

Since the share of consumption is almost double that of investments, the transition

is likely to lead to slower real GDP growth. Since we expect the transition to

continue in 2HFY18 as well, we expect real GDP growth also to remain muted –

average 6.6% YoY in 2HFY18 versus 6% in 1HFY18. It implies full-year GDP growth of

6.3% in FY18, slower than ~7% projected by the RBI (and market consensus).

Within private investments, we will have to wait (for more than a year) for official

data to understand if the current revival is driven by households or the corporate

sector (including public corporate sector). Since households’ investments suffered

badly in the last couple of years – declined 6.2% in FY16 according to official data

and grew marginally in FY17

(Exhibit 9)

according to our estimates, we reckon that

the revival in private investments may be attributable to households. Since

households account for ~39% of total investments, and are also a major investor in

construction & real estate activities, it bodes well for a broad-based recovery in the

economy

(Exhibit 10).

Exhibit 9: Nominal investments by different institutions in

the past few years

30

20

10

0

(10)

(20)

FY13

FY14

FY15

FY16

FY17E

(% YoY)

Households

Public corporate

Private corporate

Government

Exhibit 10: Share of different institutions in total

investments (average of past five years up to FY16)

(%)

Government,

10.6

Public

corporate,

10.8

Households,

39.3

Private

corporate,

39.1

Source: CSO, CEIC, MOSL

8 December 2017

4

NOTES

8 December 2017

5

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).

Motilal Oswal Securities Ltd. (MOSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOSL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock

broking services, Investment Advisory Services, Depository participant services & distribution of various financial products. MOSL is a subsidiary company of Motilal Oswal Financial Service Ltd. (MOFSL). MOFSL is a listed

public company, the details in respect of which are available on

www.motilaloswal.com.

MOSL is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock

Exchange of India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Metropolitan Stock Exchange Of India Ltd. (MSE) for its stock broking activities & is Depository participant with Central Depository Services Limited

(CDSL) & National Securities Depository Limited (NSDL) and is member of Association of Mutual Funds of India (AMFI) for distribution of financial products. Details of associate entities of Motilal Oswal Securities Limited are

available on the website at

http://onlinereports.motilaloswal.com/Dormant/documents/Associate%20Details.pdf

Pending Regulatory Enquiries against Motilal Oswal Securities Limited by SEBI:

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 requested SEBI to provide all documents, records, investigation report relied upon by SEBI which were referred in Show Cause Notice and also sought personal

hearing. The matter is currently pending.

MOSL, it’s associates, Research Analyst or their relative may have any financial interest in the subject company. MOSL and/or its associates and/or Research Analyst may have beneficial ownership of 1% or more securities in

the subject company at the end of the month immediately preceding the date of publication of the Research Report.

MOSL and its associate company(ies), their directors and Research Analyst and their relatives may; (a)

from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and

earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other

potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s),

as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOSL even though there might exist an inherent conflict of interest in some of the stocks mentioned in the

research report.

Research Analyst may have served as director/officer, etc. in the subject company in the last 12 month period. MOSL and/or its associates may have received any compensation from the subject company in

the past 12 months.

In the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report, MOSL or any of its associates may have:

a)

managed or co-managed public offering of securities from subject company of this research report,

b)

received compensation for investment banking or merchant banking or brokerage services from subject company of this research report,

c)

received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company of this research report.

d)

Subject Company may have been a client of MOSL or its associates during twelve months preceding the date of distribution of the research report.

MOSL and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. To enhance transparency, MOSL has incorporated a Disclosure

of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. MOSL and / or its affiliates do and seek to do business including investment banking with

companies covered in its research reports. As a result, the recipients of this report should be aware that MOSL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research

Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

Terms & Conditions:

This report has been prepared by MOSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to,

copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of MOSL. The report is based on the facts, figures and information that are considered

true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not

been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice.

The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though

disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOSL will not treat recipients as customers by virtue of their receiving this report.

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or

indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

Disclosure of Interest Statement



Analyst ownership of the stock

Companies where there is interest

No

A graph of daily closing prices of securities is available at

www.nseindia.com, www.bseindia.com.

Research Analyst views on Subject Company may vary based on Fundamental research and Technical Research. Proprietary

trading desk of MOSL or its associates maintains arm’s length distance with Research Team as all the activities are segregated from MOSL research activity and therefore it can have an independent view with regards to

subject company for which Research Team have expressed their views.

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law,

regulation or which would subject MOSL & its group companies to registration or licensing requirements within such jurisdictions.

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 Hong 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:

Disclaimer:

The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person

or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of

offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or

appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations

as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to

determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative

products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of

the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the

views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time

without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities

mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities

functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already

available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is

being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not

directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would

be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to

certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or

representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

The

person accessing this information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or

employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this

information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring

Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:

na@motilaloswal.com,

Contact No.:022-30801085.

Registration details of group entities.: MOSL: SEBI Registration: INZ000158836; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.

Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:

INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd.

offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products

8 December 2017

6