E
CO
S
COPE
The Economy Observer
2 November 2020
Probability of upgrades rising
Expect real GDP to decline only ~5% in 2QFY21
Our in-house Economic Activity Index (EAI) for India’s GVA (called EAI-GVA) posted growth of 2.2% YoY for the first time
in seven months in Sep’20, following decline of 2.2% YoY in Aug’20. This implies EAI-GVA shrank just 1.7% YoY in
2QFY21 v/s -18% YoY in 1QFY21. Industrial activity contracted marginally (by 0.7% YoY), while the Services sector grew
3.1% YoY (for the first time in six months) in Sep’20. Growth in farm activity eased to 5.4% YoY in Sep’20, from the
double digits in the previous three months, due to decline in fertilizer production.
The EAI-GDP index (our in-house measure for official GDP), however, contracted 2.8% YoY in Sep’20, implying decline of
5% YoY in 2QFY21, following a 7.2% decrease a month ago. Notably, fiscal spending declined 37% YoY in Sep’20 (the
worst decline in 18 months), dragging down economic growth significantly during the month. Excluding fiscal spending,
EAI-GDP actually edged up 0.1% YoY during the month, marking growth for the first time in seven months. Following six
straight months of double-digit decline, investment spending shrank only 9% YoY in Sep’20, led by strong growth in
freight traffic and power generation.
Overall, as we had pointed out
earlier,
economic recovery over Aug–Sep’20 was much better than expected and would
likely peak in Oct’20. The base effect, pent-up demand, and hopes of a grand festive season have led to strong recovery,
which would certainly lead to sharp upgrades in FY21 GDP forecasts. Accordingly, we believe real GDP decline could be
only ~5% YoY in 2QFY21, better than
our forecast
of -7.1% and the Bloomberg consensus of -11%. Recovery, however,
remains highly unbalanced – rural
v/s
urban, consumption
v/s
investments, and Services
v/s
Industrial.
Preliminary estimates
reveal India’s EAI for GVA
posted growth of 2.2% YoY
in Sep’20, implying only
1.7% YoY decline in 2QFY21.
EAI-GVA grew 2.2% YoY in Sep’20:
Preliminary estimates reveal India’s EAI for
GVA posted growth of 2.2% YoY in Sep’20 – for the first time in seven months
following six consecutive declines – implying decline of only 1.7% YoY in 2QFY21
(Exhibit 1).
Although growth in farm activity weakened to 5.4% YoY in Sep’20
(from the double digits in the previous three months), the Services sector
posted growth for the first time in six months (supported by freight traffic and
the Financial sector); industrial activity contracted only marginally during the
month
(Exhibit 2).
EAI-GDP, however, declined during the month:
EAI-GDP fell 2.8% YoY in Sep’20,
marking a 5% YoY contraction in 2QFY21, following decline of 7.2% YoY in
Aug’20
(Exhibits 3, 4).
Fiscal spending was a major drag during the month,
excluding which EAI-GDP actually inched up 0.1% YoY in Sep’20.
Exhibit 2: …supported by strong revival in Services sector
(pp)
2.2
(2.2)
2.8
3.4
0.2
-0.8
-2.9
-5.0
Jun-20
Sep-20
Sep-19
Jul-20
Aug-20
Sep-20
0.9
-3.0
0.9
-2.5
-0.6
Agri
Industry
Services
EAI-GVA
2.2
1.9
0.5
-2.2
-0.2
Exhibit 1: India’s EAI-GVA grew 2.2% YoY in Sep’20…
2.8 1.3
EAI-GVA (% YoY)
5.7 5.8 4.7 6.6
(4.1)
(5.4) (5.0)
(18.5)
(30.3)
Sep-19
Dec-19
Mar-20
Please refer to our earlier
report
for details
Source: Various national sources, CEIC, MOFSL
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com)
Yaswi Agrawal
– Research Analyst
(Yaswi.Agrawal@motilaloswal.com)
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.