22 November 2016
Economy
Diving into Trending Themes
Monthly data confirm 6.5% growth is for real in India
Creating monthly economic activity index (EAI) since 1998
Based on monthly macroeconomic indicators, we create India’s economic activity index (EAI), which shows that
the economic growth averaged 6.6% YoY in the first nine months of 2016 as against ~5% growth over the
previous five years (2011-2015). Motilal Oswal’s leading indicators (MOLI) suggest that consumption continues
to run strong; however, investment is witnessing one of the worst phases in the past two decades.
We find, however, that the growth in economic activity eased towards 5% YoY in 2QFY17 as against 7.5% in the
previous two quarters. A sharp contraction in investments, along with some deceleration in consumption, has
contributed to a slowdown in our composite EAI in the recent quarter.
It is important to note that while our composite EAI is a reliable indicator to gauge economic activity, it should
not be compared with the official GDP statistics because the latter includes an estimate for the unorganized
sector also. Our leading indicators are based on monthly data covering the formal section of society.
is Motilal Oswal’s new
product in which we deep-dive into trending macro-
economic themes. This new product complements
our existing “Ecoscope” product, which is reserved
for regular updates on macro-economics.
Since the release of new GDP series (on 2011-12 base),
its credibility has been in question. The key reason for
the disagreement is a widely-held belief that GDP data is
not in sync with high-frequency monthly indicators.
Weakness in bank credit growth and IIP (index of
industrial production) are often quoted to support this
criticism. Further, very high contribution of
‘discrepancies’ has also shaken confidence in the official
statistics. To bridge this gap, we introduce Motilal
Oswal’s leading indicators (MOLI) for consumption,
investment and external trade. Based on our
econometric analysis, we have combined five monthly
macroeconomic data series to create MOLI for
consumption, eight monthly data points to create MOLI
for investment, and five data points to create MOLI for
external trade (of goods & services).
“EcoKnowLedge”
These leading indicators are then weighted to create a
composite monthly index for economic activity.
Exhibit 1
shows the high correlation between our composite EAI
and official estimates of real GDP growth (excluding
discrepancies). The two indicators share a strong pair-
wise correlation, which is as high as ~71%.
Exhibit 1: Strong correlation between our composite EAI and
real GDP growth
15
12
9
6
3
0
Q2FY02
Q2FY05
Q2FY08
Q2FY11
Q2FY14
Q2FY17
Composite EAI
(% YoY)
Real GDP*
* Excluding discrepancies
4-quarter moving average
Source: CEIC, several national sources, MoSL
Innovation is seeing what everybody
has seen and thinking what nobody
has thought
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Further, our leading indicators are available for almost
two decades, providing a great source of information on
Indian economic activity since late 1990s. We also find
that MOLI confirm consumption to be the key driver of
economic growth, while investments lag markedly.
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
We have divided this report into six parts. The key
highlights are mentioned below:
#1: Introducing Monthly Economic Activity
Index (EAI) – Indian economy grew 5% YoY
in 2QFY17
Based on monthly macroeconomic data, we create a
composite EAI for the Indian economy. Although the
growth in our composite EAI is lower than headline GDP
growth, the average growth in the former was 6.6% in
the first nine months of 2016 against an average growth
of ~5% in the past five years (2011-2015). Our composite
EAI shows that the economy grew ~5% YoY in 2QFY17,
significantly lower than the 7.5% growth in the previous
two quarters
(Exhibit 2).
Exhibit 2: Economic activity has picked up markedly in 2016
but eased in 2QFY17
9.5
(%, YoY)
Composite EAI
7.0
5.9
3.7
2.3
4.7
3.3
4.2
8.0
4.9
The average growth in our EAI was 6.6%
in the first nine months of 2016, as
against an average growth of ~5% in the
past five years
#3: Estimating separate leading indices for
consumption and investment
Apart from composite EAI, we also introduce Motilal
Oswal’s leading indicators (MOLI) for consumption,
investment and external trade separately
(Exhibit 4).
It is
apparent that investments have been the key dragger on
Indian economy over the past many quarters, while
consumption has been holding up. These sub-indices are
weighted as per their GDP share in period ‘t-1’ to derive
the composite EAI. Apart from providing MOLI and EAI,
we have also created heat maps for major monthly data
points on consumption and investment, which are
studied to create several leading indicators.
Exhibit 4: Investment has declined substantially in 2016,
while consumption remains strong
15
10
5
Consumption
(%, YoY)
Investment
Q1FY15
Q4FY15
Q3FY16
Q2FY17
Source: CEIC, several national sources, MoSL
0
(5)
(10)
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Source: CEIC, several national sources, MoSL
#2: Providing a long-term monthly EAI
series based on monthly indicators
Since monthly data points are available from April 1998,
we are able to provide composite EAI for almost two
decades. The long-run (since FY2000) average growth, as
per our composite EAI is 7%, similar to the official GDP
growth estimate
(Exhibit 3).
Exhibit 3: Composite EAI begins from April 1998
20
14
8
2
(4)
(% YoY)
Long-run average
growth of 7%
The long-run (since FY2000) average
growth, as per our composite EAI is 7%,
similar to the official GDP growth
estimate
Source: CEIC, several national sources, MoSL
22 November 2016
2
 Motilal Oswal Financial Services
#4: Consumption and external sector key #5: Getting rid of the anomaly known as
contributors to EAI; investments a “Discrepancies”
significant drag
One of the key confusions related to official GDP
One of the benefits of availability of sub-indices is better
knowledge of the key drivers of headline numbers. The
drivers are as important – if not more – as the headline
growth.
Exhibit 5
shows that net exports have been a key
contributor to EAI growth over the past three quarters.
Although consumption growth moderated in 2QFY17,
investments acted as a key drag on EAI growth.
Exhibit 5: Key contributors to our EAI growth (%, YoY) in the
past six quarters
Consumption
(pp)
1.6
0.7
3.8
(1.1)
5.1
(0.8)
4.5
(0.1)
(0.2)
Q3FY16
Q4FY16
1.2
1.0
5.0
2.5
5.5
(0.1)
2.2
4.5
(1.8)
Investment
Net exports
GDP
statistics is high contribution of ‘discrepancies’. Since our
leading indicators are based on official monthly
macroeconomic data points, we don’t make any
assumptions, and thus, our indices are free from
‘discrepancies’. Not surprisingly then, our composite EAI
shares a very strong correlation of ~64% with real GDP
growth excluding discrepancies
(Exhibit 6).
Exhibit 6: Strong correlation between our composite EAI and
official real GDP growth (excluding discrepancies)
15
12
9
6
3
0
Q2FY02
(% YoY)
Composite EAI
Real GDP*
Q1FY16
Q2FY16
Q1FY17
Q2FY17
Q2FY05
Q2FY08
Q2FY11
Q2FY14
Q2FY17
Source: CEIC, several national sources, MoSL
Source: CEIC, several national sources, MoSL
Net exports have been a key contributor to
EAI growth over the past three quarters.
Although consumption growth moderated
in 2QFY17, investments acted as a key
drag on EAI growth
#6: Consumption remains the key driver of
growth, while investments lag
A look at the long-term trends in consumption and
investment reveals that consumption is the key driver of
economic growth. Further, the differential between
consumption and investment has widened considerably
in the past few years, as the latter has been stagnant
since 2012
(Exhibit 7).
Exhibit 7: Economic activity has eased to seven-month low in
July 2016
155
140
125
110
95
80
(2011-12=100)
Source: CEIC, several national sources, MoSL
22 November 2016
3
 Motilal Oswal Financial Services
#1: Introducing Monthly Economic
Activity Index (EAI)
EAI grew 5% YoY in 2QFY17
Since January 2015, when the new GDP data series
(2011-12 base) was released, it has been regularly
criticized due to its perceived disconnect with the high-
frequency monthly indicators. A few widely covered
monthly indicators such as weak bank credit growth and
index of industrial production (IIP) have been forwarded
to support the criticism since they were highly correlated
with the old GDP series (2004-05 base).
Nevertheless, we note that there are quite a lot of other
macro-economic indicators that have grown at a decent
pace in recent years. In this note, we have created
leading indicators for economic activity using several
monthly macro-economic data points. The objective of
creating monthly EAI is to provide our readers with a
long-term index, which is free from discrepancies and
does not undergo any base revision. Our monthly EAI
begins from FY99, providing robust data for almost two
decades of a liberalized Indian economy.
EAI has a strong correlation with real GDP*:
Exhibit 8
below compares the movement in our composite EAI
and real GDP*. Since discrepancies cannot be estimated,
we have used real GDP excluding discrepancies. The pair-
wise correlation between our monthly data based
composite EAI and real GDP* is as strong as 64%, which
is reflected graphically also. Further, it is important to
note that the correlation with real GDP (including
discrepancy) is also strong at 45%.
Based on sub-indices, we estimate that
India’s EAI grew 5% YoY in 2QFY17,
following 8% in 1QFY17…
…while India’s EAI has decelerated in
2QFY17, it has improved substantially
since the beginning of 2016
The objective of creating a long-term
monthly economic activity index
(available since 1998) is to provide a
reliable index, which is free from
discrepancies
EAI grew 5% YoY in 2QFY17:
Our composite EAI
comprises consumption, investments and net exports (of
goods & services). Based on these sub-indices, we
estimate that India’s EAI grew 5% YoY in 2QFY17,
following 8% growth in 1QFY17
(Exhibit 9).
The growth in
economic activity, thus, seems to have eased in 2QFY17.
However, it is equally important to note that EAI grew
6.6% in the first nine months of 2016, as against an
average growth of 5% in the past five years (2011-2016).
Overall, while India’s EAI growth has decelerated in
2QFY17, it has improved substantially since the
beginning of 2016.
Exhibit 8: Strong correlation between our composite EAI
and real GDP* growth
Exhibit 9: Our composite EAI shows strong pick-up in growth
in the past few months
* Excluding discrepancies
3-month moving average
Source: RBI, CSO, Various national sources, CEIC, MoSL
22 November 2016
4
 Motilal Oswal Financial Services
#2: Providing a long-term monthly EAI
series based on monthly indicators
Monthly series begins from 1998
The official statistics on GDP released by the Central
Statistics Office (CSO) are the broadest measure of
economic activity, and thus, hold great significance.
Nevertheless, regular revision in base year, although
important, creates confusions in GDP series. Therefore,
one of the key objectives to create a monthly EAI was to
provide a consistent measure of economic activity, which
is available for as long back in history as possible. Our
leading indicators for consumption and investment are
available from April 1998, implying almost two decades
of monthly EAI. As highlighted, the users of monthly
composite EAI and several MOLI don’t need to worry
about base revisions or change in methodology.
Exhibit 10: Long-term history of our composite EAI provides
an added advantage to its users
Notably, while real GDP growth in the recent past (since
FY13) has been weaker than the growth in the previous
decade (FY04-13), it is similar to the growth seen during
the previous slowdown in early 2000s (FY00-04).
While real GDP growth in the recent
past (since FY13) has been weaker than
the growth in the previous decade
(FY04-13), it is similar to the growth
seen during the previous slowdown in
early 2000s
Stable consumption versus volatile investments:
Another key advantage of our detailed work on leading
indicators is separate indices for consumption and
investment activity. These indices help us identify the
Exhibit 11: A glance at the log-term trend in consumption and
investments
Source: RBI, CSO, Various national sources, CEIC, MoSL
Monthly composite index available since late 1990s:
Exhibit 10
provides the long-term series of composite
EAI. The Indian economy has undergone four different
business cycles over the past two decades. During late
1990s and early 2000s (under NDA-I government), EAI
growth averaged 6%, followed by tremendous growth of
~9% during the mid-2000s. As global financial crisis hit
the world economy, growth in domestic economic
activity slowed to ~7%; recent EAI growth is ~6%.
A look at the long-term monthly data
reveals that Indian economy has
undergone four different business
cycles over the past two decades
key driver(s) or dragger(s) of domestic economic activity.
As is apparent from
exhibit 11,
while consumption
growth has been stable over the past two decades,
investment has been volatile. Since FY00, consumption
growth has averaged 7%, ranging between (-)0.4% and
20.1%. Investment growth, on the other hand, has
averaged 7.1%, ranging between (-)9.1% and 31.9%. In
other words, investment is at least three times more
volatile than consumption. It also confirms that
investment has been the key determinant of business
cycle in the economy.
22 November 2016
5
 Motilal Oswal Financial Services
Based on our econometric analysis, we assign different
weights to the five most important variables (which also
Consumption continues to be key driver of growth
give the highest adjusted R-square of ~40%) to estimate
MOLI for consumption. A comparison of actual
Any economy comprises of three main activities –
consumption growth (from GDP data) and our leading
consumption, investment and foreign trade. Thus, we
indicator for consumption
(Exhibit 12)
shows a very high
calculate separate leading indicators (known as Motilal
correlation of ~64% (based on last 15 years data).
Oswal’s Leading Indicators or MOLI) for these three
components, which are then combined to arrive at the
Consumption grew 6.4% YoY in 2QFY17:
Based on the
composite economic activity index (EAI).
monthly leading indicator, we find that consumption
grew 6.4% YoY in 2QFY17, following an average growth
Consumption growth remains strong:
To create a
of 7.4% over the previous four quarters
(Exhibit 13).
In
monthly leading indicator for consumption (private +
other words, consumption has grown 7.1% YoY in
government) in the economy, we compiled almost 15
1HFY17, as against 6.5% in the corresponding period last
monthly macroeconomic data variables (Please see
year. Thus, consumption in the Indian economy
exhibit 14
for the heat map of select indicators). Of these
continues to grow at a sturdy pace of ~7.5%.
variables, we find five indicators – petrol consumption,
rural wages, passenger traffic, central government’s
We find that consumption grew 6.4%
revenue spending, and production index for consumer
YoY in 2QFY17, following an average
durable goods – highly relevant (based on actual
growth of 7.4% over the past four
consumption growth) to estimate consumption activity
quarters
in the economy.
#3: Separate leading indicators for
consumption and investments
A comparison of actual consumption
growth and our leading indicator for
consumption shows very high
correlation of ~64%
Notably, a look at the heat map shown in
exhibit 14
shows that none of the five most important monthly
indicators for consumption was in green (better than
previous quarter and a year ago) category in 2QFY17. In
fact, two of the five were in red category (worse than
previous quarter and a year ago) in the recent quarter.
Exhibit 13: Consumption (private + government) seems to
have grown 6.4% YoY in 2QFY17
Exhibit 12: MOLI for consumption shares a very strong
correlation with actual consumption growth
4-quarter average
Source: Various national sources, CEIC, MoSL
22 November 2016
6
 Motilal Oswal Financial Services
Exhibit 14: Heat map for leading indicators of consumption
% YoY
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
1
2
7
Currency
11.6
10.6
9.6
11.3
10.2
11.6
13.0
14.9
15.7
15.2
Auto sales Petrol sales
11.4
17.3
1.4
0.4
1.4
(0.3)
5.9
7.7
13.2
20.2
9.5
11.1
8.8
16.3
12.3
16.1
14.4
15.4
10.0
11.7
1
Rural
2
wages
2.5
0.5
2.1
2.6
2.5
3.5
0.4
0.3
0.0
(0.1)
Passenger
3
traffic
6.7
(5.9)
(4.6)
(3.8)
(8.2)
2.9
1.5
2.4
0.3
0.3
Revenue
4
spending
2.6
6.4
18.8
1.4
1.4
1.2
(1.7)
11.6
27.9
5.8
Imports
(22.7)
32.1
48.6
18.6
3.0
3.3
(4.7)
(6.4)
(11.9)
(15.2)
5
Foreign
tourists
6
arrival
6.7
(6.3)
(4.9)
(4.2)
(8.7)
2.6
1.1
2.0
(0.1)
0.8
Consumer
durable
goods
(9.5)
(15.5)
(20.9)
(4.7)
3.7
11.9
23.2
8.7
7.8
7.4
Personal
credit
15.3
13.5
15.3
15.5
17.1
18.0
16.1
19.4
18.5
19.7
Includes passenger vehicles and two-wheelers
Real rural wages; deflated by CPI for rural workers
3
Railways and aviation
4
Excluding interest payments (only for central government)
5
Imports of agricultural items, leather products, gold, silver, precious metals, newsprint and electronic goods, textiles
6
In persons unit
7
Data for rural wages available only till July. Aug-Sep 2016 are our estimates
Source: Various National Sources, CEIC, MoSL
Exhibit 15: Heat map for leading indicators of investment
% YoY
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
1
2
Cargo
1
traffic
4.2
4.2
6.7
1.8
1.7
1.5
(0.2)
(0.5)
(0.4)
(2.8)
Electricity
11.3
9.5
9.4
3.7
2.3
6.8
3.9
8.8
9.0
1.3
Industrial
2
3
Auto sales Govt capex Diesel sales
credit
11.3
7.9
7.3
6.0
5.3
4.9
5.0
4.6
0.6
0.4
(5.3)
8.3
5.7
3.0
(0.6)
(1.8)
9.5
20.4
17.5
2.3
(8.6)
16.4
(32.4)
92.2
17.6
41.1
43.3
(15.3)
(16.4)
23.5
0.3
2.6
1.1
2.2
3.6
8.0
7.5
11.4
4.7
0.8
Capital
goods’
4
imports
(13.4)
(10.5)
6.0
2.8
6.9
0.5
(11.0)
5.7
(10.1)
(7.4)
Cement
9.6
9.9
4.2
(0.5)
1.4
1.6
4.3
11.4
5.7
3.3
IIP: Non-
metallic
products
7.6
5.5
1.4
(3.9)
(2.9)
(1.1)
1.6
8.9
3.3
1.4
IIP: Capital
goods
13.6
(0.5)
3.2
9.9
2.0
13.4
(9.5)
(15.5)
(18.1)
(24.5)
Includes railways and waterways
Include commercial vehicles and three-wheelers
3
Capital spending by central government
4
Machinery & equipments, Transport equipments, machine tools and project goods
Source: Various National Sources, CEIC, MoSL
Worse than previous quarter and a year ago
Better than the previous quarter but worse than a year ago
Worse than the previous quarter but better than a year ago
Better than previous quarter and a year ago
 Motilal Oswal Financial Services
Investments, however, have collapsed in 2QFY17:
To
create a leading indicator for investments, we
considered another 15 monthly macroeconomic
variables to begin with. The heat map for 10 of these
monthly indicators is provided in
exhibit 15.
Based on
our econometric analysis, we find eight out of 10
variables – cargo traffic, power generation, auto sales,
diesel consumption, capital goods imports, production
index for capital goods, cement production and
production index for non-metallic mineral products –
highly relevant for creating Motilal Oswal’s leading
indicator (MOLI) for investments.
We assign fixed weights to each of these eight relevant
variables to create MOLI for investments.
Exhibit 16
shows that the correlation between actual investment
growth (based on GDP data) and our leading indicator for
investments is as strong as ~80%.
A look at the heat map given on the above page
(exhibit
15)
reveals that for the first time in at least the past 10
quarters, not even a single indicator – out of eight
relevant variables – was in green category, while seven
indicators posted a deceleration (in YoY terms) in
2QFY17 in comparison to 1QFY17.
Based on several monthly indicators,
we believe that investments declined
6% YoY in 2QFY17, marking the third
fall in the past four quarters and the
second worst fall since FY00
External trade continues to add to composite economic
activity index:
Finally, we collected data on exports and
imports of goods & services to calculate MOLI for the
external trade sector. We deflated them by headline
wholesale price index (WPI) to calculate real exports and
imports. Not surprisingly, our leading indicators are
highly correlated with data on real exports and imports
released in quarterly GDP data. In 2QFY17, while imports
posted their worst contraction (12.7% YoY) in seven
years, exports declined 1.5% as against a growth of 2.4%
in 1QFY17. Consequently, external trade added to EAI
growth for the third consecutive quarter in 2QFY17.
The correlation between actual
investment growth (based on GDP
data) and our leading indicator for
investments is as strong as ~80%
Following a decline of 0.5% YoY in 1QFY17, our leading
indicator for investments showed a steeper contraction
in 2QFY17. Based on monthly data, we believe that
investments declined 6% YoY in 2QFY17
(exhibit 7),
marking its third fall in the past four quarters and the
second worst fall since FY00. It implies that investments
declined 3.2% YoY in 1HFY17, marking the worst first half
in almost two decades.
Exhibit 16: MOLI for investment shares a very strong
correlation with actual investment* growth
Exhibit 17: Investment growth has stalled for the third time
in the past four quarters in 2QFY17
* Fixed capital formation + change in inventories
22 November 2016
Source: Various national sources, CEIC, MoSL
8
 Motilal Oswal Financial Services
#4: Key contributors to quarterly growth
in our composite EAI
Consumption growth has eased and investment
posted second-worst contraction in 2QFY17
A closer look at the recent trends in various components
of EAI growth will help us discern the key drivers (and
draggers) of India’s economic activity.
Exhibit 18
shows
that consumption growth moderated to a five-quarter
low of 6.4% YoY in 2QFY17; however, investments
plummeted 6% YoY as against a decline of 0.5% in
1QFY17. Notably, the drop in investments was the
second-worst quarterly contraction since FY00 (the worst
was a fall of 6.7% YoY in 4QFY09). Further, while exports
and imports of goods & services move mostly in the
same direction, the former declined only marginally (by
1.5% YoY) in 2QFY17 and the latter fell ~13%, reflecting a
slowdown in consumption and exceptional decline in
investments.
Further, since investments declined at the second worst
pace in almost two decades, this deducted almost 2pp
from EAI growth in 2QFY17. This is in sharp contrast to
the average addition of 1.2pp in FY15 and 0.8pp in FY16
(Exhibit 19).
External sector adds significantly to economic activity
growth:
Finally, while domestic activity seems to have
moderated significantly in 2QFY17, a faster decline in
imports (than exports) has supported the headline EAI
growth. Net exports of goods & services added 2.2pp to
EAI growth in 2QFY17, marking the third consecutive
quarter of positive contribution and slightly lower than
2.5pp in 1QFY17.
Net exports of goods & services added
2.2pp to EAI growth in 2QFY17,
marking the third consecutive quarter
of positive contribution and slightly
lower than 2.5pp in 1QFY17
Exhibit 19: Contribution of key components to our composite
EAI growth
Exhibit 18: Change (% YoY) in various components of our
composite EAI in the past few quarters
Source: RBI, CSO, Various national sources, CEIC, MoSL
Consumption growth moderates, while investments
drag economic activity:
Exhibit 19
charts the
contribution of different components to EAI growth in
the past six quarters. As consumtpion growth moderated
to a 5-quarter low in 2QFY17, its contribution also fell
from 5.5pp in 1QFY17 to 4.5pp in the recent quarter.
Overall, extraordinary decline in production of capital
goods has contributed to sharp fall in investments. On
the other hand, moderate growth in government
spending after two quarters of strong growth has led to
moderation in consumption growth. All these factors
have led to deceleration in EAI growth in 2QFY17.
Consumption growth moderated to a
five-quarter low of 6.4% YoY in
2QFY17; however, investments
plummeted 6% YoY as against a
decline of 0.5% in 1QFY17
22 November 2016
9
 Motilal Oswal Financial Services
#5: Getting rid of an anomaly known as
“discrepancies”
Our leading indicators are based on official
monthly data points without any assumptions
One of the key confusions that raises doubts over the
credibility of official GDP statistics is the component
known as ‘discrepancies’. Though it is a commonly found
residual item in all economies’ GDP statistics, high
contribution of ‘discrepancies’ to India’s GDP growth is
discomforting. In FY16, ‘discrepancies’ accounted for
almost one-third of real GDP growth. It is important to
note that FY16 was not an exceptional year –
discrepancies have always played a significant role in
India’s GDP statistics
(Exhibit 20).
On a long-term basis,
however, ‘discrepancies’ have contributed nothing to
real GDP growth. We have explained in one of our earlier
reports
that ‘discrepancies’ don’t hurt the credibility of
headline GDP numbers.
Exhibit 20: Contribution of ‘discrepancies’ to India’s real
GDP growth (pp)
Nevertheless, it does not mean that there is no
difference in our composite EAI and real GDP* growth.
Most of the times, real GDP growth appears over-stated
in comparison to our composite EAI. In FY09, however,
while real GDP growth witnessed a sharp slowdown, this
was not reflected in our composite EAI.
Over the longer-term, the difference between our
composite EAI and official GDP* growth has been only
0.3 percentage points (pp). Notably, while headline real
GDP growth in the recent past has been much higher
than suggested by our composite EAI, the long-term
average of the difference is only 0.2pp.
Over the longer-term, the difference
between our composite EAI and
official GDP* growth has been only
0.3 percentage points
Exhibit 21: Comparison of composite EAI with official
estimate of real GDP* growth (% YoY)
* excluding discrepancies
Source: RBI, CSO, Various national sources, CEIC, MoSL
Composite EAI strongly correlated with real GDP
growth excluding discrepancies:
Our composite EAI and
its components, however, get rid of this anomaly, as our
leading indictaors are based on official monthly
macroeconomic data and do not hold any assumptions.
Not surprisingly then, our composite EAI shares an
extremely strong correlation with the official estimate of
real GDP growth excluding discrepancies
(Exhibit 21).
Overall, apart from providing a long-term historical series
on monthly basis, our composite EAI series is also
discrepancy-free, which adds further credibility to our
leading indicators.
Our leading indicators get rid of
“discrepancies”, as they are based on
official monthly macroeconomic data
without any assumptions
22 November 2016
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 Motilal Oswal Financial Services
…while investments are going through the worst
episode:
In contrast to consumption, investments have
been extremely volatile. As
exhibit 23
shows, investment
Investments witness worst contraction in FY17
growth in the recent past is even lower than during the
previous slowdown in the early 2000s.
While
We believe that drivers of economic growth are as
investments grew at an average of ~5% in the early
important, if not more, as headline growth. Therefore, it
2000s, they grew at an average of ~15% during the boom
is important to look at the long-term trends in two key
period. The growth, however, has moderated drastically
domestic economic activities – consumption and
to only 0.8% over the past four years.
investment. The Indian economy has witnessed four
business cycles over the past two decades.
Exhibits 22-23
Consumption is the key driver of GDP growth…:
As we
show the movements in consumption and investment
have argued
earlier
also, consumption is the key driver of
during the three cycles – previous slowdown in early
GDP growth, while investments continue to languish. In
2000s (FY99=100), boom period in the mid-2000s decade
fact, the widening differential between consumption and
(FY03=100) and recent period (FY12=100). We have
investments does not bode well for the economy –
chosen to ignore the FY09-13 period because it created a
higher demand than supply is inevitably inflationary.
lot of imbalances in the economy.
Thus,
the current economic model seems unsustainable.
Exhibit 22: Consumption growth has been broadly stable
during different business cycles…
Exhibit 23: …however, domestic investments are witnessing
the worst period
#6: Consumption is the key driver of
economic growth
Source: RBI, CSO, Various national sources, CEIC, MoSL
Consumption growth has been extremely stable
Investment growth in the recent past
irrespective of business cycle…:
Exhibit 22
compares the
is even lower than during the
growth in consumption (private + government) during
previous slowdown in early 2000s
the three business cycles. Interestingly, irrespective of
different economic environment, consumption growth
has been broadly similar in all three cycles – average
…along with external trade:
Another interesting fact to
growth of 6.5% between FY00 and FY04, 7% between
note is that while export growth in the recent past has
FY04 and FY08, and 6.7% since FY13. It shows the
been worse than the growth witnessed during earlier
extreme resilience of Indian consumption.
episodes, weaker growth in imports has helped India to
post an improvement in external trade balance, which
Irrespective of different economic
adds to real GDP growth in the short run. However,
environment, consumption growth
lower deficit on foreign trade implies suboptimal
has been broadly similar in all three
utilization of foreign savings, which may hurt the
cycles – 6.5% in early 2000s, 7%
economy over the longer period.
during the boom period and 6.7% in
the recent past
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 Motilal Oswal Financial Services
Leading indicators don’t include unorganized sector:
The economy, however, also has a large section that is
not covered by several monthly indicators. The official
Unorganized sector not captured in our leading
agencies prepare an estimate of such unorganized
indicators
activities based on quinquennial surveys (from National
Sample Survey Organization (NSSO)) and include them in
The objective of creating monthly leading indicators for
GDP estimates to provide a comprehensive picture. Since
economic activities in India was multi-fold. With the
our leading indicators don’t make any assumptions on
recent revisions in official statistics, there was, we
the unorganized sector, composite EAI growth is not
believe, a dire need for a credible and long-term series
directly comparable with official GDP growth
(exhibit 24).
on Indian economic activity, which could be easily
verified by high-frequency monthly indicators. The need
Since our leading indicators don’t
for a clean and robust monthly series was further
make an assumption on unorganized
intensified by the fact that ‘discrepancies’ accounted for
activities, composite EAI growth is not
about one-third of headline real GDP growth in FY16.
directly comparable to the official GDP
Accordingly, we have created Motilal Oswal’s leading
growth
indicators (MOLI) for consumption, investment and
external trade to create a composite economic activity
indicator (EAI) for the Indian economy. Since the relevant
monthly data is available from April 1998 onwards, our Not only do they exclude the unorganized sector, official
statistics on high-frequency industrial activities (such as
EAI is available for almost two decades.
index of industrial production, IIP) are primarily based on
Exhibit 24: Strong co-movement between our composite EAI
listed companies. As we have discussed
earlier,
a
comparison of the performance of listed companies and
and real GDP growth
15
a broader corporate sample covering unlisted companies
Composite EAI
Real GDP*
reveals the divergence between strong national statistics
(% YoY)
12
and weak (listed) corporate sector’s performance. Thus,
since our leading indicators don’t make an assumption
9
on unorganized activities, composite EAI is not directly
6
comparable to the official GDP statistic. However, since
our EAI is based on certain fixed monthly
3
macroeconomic data series, it is a useful indicator to
0
compare the long-term economic trends in the economy.
Q2FY02
Q2FY05
Q2FY08
Q2FY11
Q2FY14
Q2FY17
* Excluding discrepancies
4-quarter moving average
Source: CEIC, several national sources, MoSL
Word of caution: Underlying differences
between official GDP and composite EAI
Composite EAI complementary, not a substitute, to
official statistics:
Nevertheless, we must note that our
composite EAI is not a substitute, but complementary, to
official GDP estimates because of some underlying
differences. As our composite EAI is based on several
monthly indicators, it is based on only observable
activities covered by official high-frequency statistics.
We must note that our composite EAI
is complementary, not a substitute,
for official GDP estimates
22 November 2016
12
 Motilal Oswal Financial Services
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