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Economic activity growth at five-year low in 4QFY17
Expect real GDP growth for the quarter to decelerate to ~6%
3 May 2017
The Economy Observer
India’s monthly economic activity index (EAI) eased to below 1% YoY in March 2017, marking its lowest growth in the
past 15 months. Consequently, EAI grew ~2% YoY in 4QFY17, the slowest in the past five years. For the full-year FY17,
EAI grew 5%, similar to the growth witnessed in the past two years.
Further details show that while investments were broadly unchanged in March, a sharp decline in consumption
spending by the central government weakened overall consumption. High growth in imports also dragged EAI.
Our EAI shares a very good correlation with official GDP (excluding discrepancies). Consistent weakness in EAI points to
deceleration in real GDP, which we expect will grow ~6% in 4QFY17 against 7.2% in the first three quarters of FY17.
EAI grew only 1.7% YoY in
the last quarter of FY17 –
lower than 6.1% growth in
the first three quarters
Our EAI has a very strong
correlation with real GDP
(excluding discrepancies);
we expect real GDP growth
to decelerate to ~6% in
4QFY17
India’s economic activity growth fell to 0.5% YoY in March 2017…:
Preliminary
estimates reveal that India’s EAI grew only 0.5% YoY in February 2017, marking
the lowest growth in 15 months
(Exhibit 1).
As we have noted earlier, economic
activity growth has weakened considerably post demonetization, which is
reflected in our monthly index from December onwards. March was the
fourth
consecutive month of sub-4% growth.
A look at the sub-components shows
that while the decline in investments was slower than in the previous three
months, fiscal-driven weakness in consumption led to the slowdown in March
(Exhibit 2).
…implying five-year lowest growth in 4QFY17:
A look at the quarterly data
shows that EAI grew only 1.7% YoY in the last quarter of FY17 – lower than 6.1%
growth in the first three quarters. Not only was the growth in consumption the
lowest in three years, the decline in investments was also higher than in
3QFY17. For the full-year FY17, EAI grew 5%, similar to the growth in the past
two years.
Weakness in March driven by soft consumption spending…:
Our index for
consumption growth eased to a 22-month low of 3.6% YoY in March 2017,
almost entirely driven by an estimated decline in the central government’s core
revenue spending excluding interest payments
(Exhibit 3).
Further, we believe
that investments were unchanged in March, primarily due to an estimated
improvement in IIP for capital goods
(Exhibit 4).
Other indicators have, however,
done better than in the past few months (see
Exhibit 7-8
for the heat map).
…and higher trade deficit:
Further, real imports grew faster than exports (35.1%
v/s 18.6%), leading to a widening of trade deficit
(Exhibit 5).
It deducted 1.4pp
from EAI growth in March 2017.
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).
We expect real GDP growth to decelerate to ~6% 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, March’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
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