E
CO
S
COPE
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
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.

Exhibit 1: India’s economic activity growth decelerates to
0.5% in March 2017…
% YoY
12
9
6
3
0
3mma
Economic Activity Index
Exhibit 2: …driven by fiscal-led weakness in consumption
and subdued investments (pp)
Consumption
Investment
Net exports
EAI
3.9
1.3
6.2
4.9
(0.3)
(0.9)
4.4
(1.9)
(0.2)
2.4
(0.1)
(1.4)
Please refer to our earlier
report
for details
Shows contribution of different components to EAI’s growth
Exhibit 3: MOLI for consumption eased to 22-month lowest
level of 3.6% YoY in March 2017…
% YoY
12
9
6
3
0
3mma
MOLI: Consumption
Exhibit 4: …however, the decline in investments was slower
than in previous few months
% YoY
8
4
0
(4)
(8)
(12)
3mma
MOLI: Investment
Exhibit 5: Imports grew faster than exports, leading to
widening of trade deficit (% YoY)
40
20
0
-20
-40
Exports
Imports
Exhibit 6: Our composite EAI shares a very strong
correlation with real GDP growth (% YoY)
16
12
8
4
0
Composite EAI
Real GDP*
Source: CEIC, Various official sources, MOSL
* Excluding discrepancies
4-quarter moving average
3 May 2017
2

Exhibit 7: Key leading indicators for consumption
% YoY
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
1
3
Currency
14.9
15.1
14.7
15.7
16.7
17.4
15.2
17.2
(23.6)
(39.9)
(37.8)
(30.3)
(19.7)
Auto
1
sales
10.0
19.8
9.3
10.9
14.0
24.9
21.4
8.1
(4.7)
(18.6)
(4.2)
1.3
1.7
Petrol
sales
21.5
11.9
13.6
4.4
14.7
24.9
(3.4)
13.8
14.3
7.9
(0.6)
3.1
2.9
Rural
2
wages
0.8
0.3
(0.2)
(0.2)
(1.0)
(0.2)
0.6
1.8
2.5
2.9
3.1
2.8
3.1
7
Passeng
er
3
traffic
(0.6)
0.2
1.5
(0.7)
1.1
2.3
0.4
(0.4)
7.3
(0.9)
1.9
(0.3)
2.6
Revenue
4
spending
23.9
12.5
30.0
43.6
(17.7)
1.6
33.1
52.7
15.9
(8.0)
33.0
22.0
(15.0)
7
2
Imports
(22.9)
(22.9)
(13.5)
(7.4)
(18.0)
(13.3)
0.0
8.5
9.5
0.3
10.6
21.8
45.3
5
Foreign
tourists
6
arrival
(1.2)
(0.3)
1.0
(1.2)
0.6
1.9
(0.1)
(0.9)
7.0
(1.5)
1.3
(0.7)
2.3
Consumer
durable
goods
10.1
11.8
5.9
5.4
5.8
2.1
13.9
0.6
9.4
(8.9)
6.7
(0.9)
(0.1)
7
Personal
credit
19.4
19.7
19.1
18.5
18.8
18.1
19.7
17.0
15.2
13.5
12.9
12.0
16.7
Includes passenger vehicles and two-wheelers
Real rural wages; deflated by CPI for rural workers
4
Railways and aviation
Excluding interest payments (only for central government)
5
Imports of agricultural items, leather products, newsprint and electronic goods, textiles (excluding gold, silver, precious metals)
7
6
In persons unit
Our forecasts for March 2017
Exhibit 8: Key leading indicators for investment
% YoY
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
1
Cargo
1
traffic
0.9
1.0
0.8
4.0
(0.2)
(1.6)
1.0
2.8
7.2
4.7
1.5
2.3
8.3
Electricity
17.9
14.7
4.6
8.1
1.6
0.1
2.2
2.8
10.2
6.0
4.8
1.5
5.9
Industrial
credit
2.7
0.1
0.9
0.6
0.6
(0.2)
0.9
(1.7)
(3.4)
(4.3)
(5.1)
(5.2)
(1.9)
Auto
2
sales
21.4
25.4
21.4
7.7
1.0
5.0
1.1
8.3
(18.3)
(19.1)
(12.1)
(4.7)
(3.6)
Govt
capex
(52.9)
(20.5)
7.5
(24.4)
(18.7)
239.1
20.3
(165.7)
11.5
32.7
7.2
25.8
277.3
5
Diesel
sales
15.4
4.3
8.1
1.5
1.8
13.0
(11.4)
5.2
10.6
1.2
(7.7)
(3.8)
0.3
2
Capital
goods’
4
imports
(2.1)
(27.8)
(1.9)
1.7
(7.1)
(10.5)
(4.7)
7.7
(11.3)
5.1
1.8
(24.8)
(4.6)
Cement
Production
12.9
4.4
2.4
10.3
1.4
3.1
5.5
6.2
0.5
(8.7)
(13.3)
(15.8)
(6.8)
IIP: Non-
metallic
products
9.3
3.4
1.0
5.5
(0.7)
2.2
3.5
3.2
(0.8)
(9.2)
(11.4)
(13.2)
(13.0)
5
IIP: Capital
goods
(15.3)
(25.3)
(12.5)
(16.1)
(29.4)
(22.4)
(21.6)
(27.0)
14.3
(3.9)
10.9
(3.4)
(0.2)
5
Includes railways and waterways
3 Capital spending by central government
5
Our forecasts for March 2017
Source: Various National Sources, CEIC, MoSL
Include commercial vehicles and three-wheelers
4 Machinery & equipment, transport equipment, machine tools and project goods
Worse than previous month and a year ago
Better than the previous month but worse than a year ago
Worse than the previous month but better than a year ago
Better than previous month and a year ago
3 May 2017
3

Leading indicators for consumption: Fiscal-led weakness in March 2017
Exhibit 9: Consumer auto sales rose again in March 2017
(% YoY)
Auto sales#
Exhibit 10: Petrol consumption remained subdued in March
(% YoY)
Petrol sales
1.7
2.9
# Includes passenger vehicles and two-wheelers
Exhibit 11: Real wages continued to pick up due to sharp fall
in inflation
Real rural wages
Exhibit 12: Passenger traffic growth declined again in March
2017
(% YoY)
Passenger traffic
3.1
(0.7)
(% YoY)
Mar-17 is our estimate
Deflated by CPI for rural workers
Railways + Aviation
Exhibit 13: Central government’s revenue spending declined
sharply in March…
Central government's core revenue spending
(% YoY)
Exhibit 14: …and consumption-based imports increased
sharply in the past few months
(% YoY)
Consumption based imports
45.3
(15.0)
Revenue spending excluding interest payments
Data for March is not out. We calculate it based on FY17RE
Imports of agricultural items, leather products, newsprint and
electronic goods, textiles
3 May 2017
4

Exhibit 15: Foreign tourist arrivals picked up again in March
2017
(% YoY)
Foreign tourist arrivals
Exhibit 16: Production of consumer durable goods expected
to remain subdued in March
(% YoY)
IIP: Consumer durables
2.3
(0.1)
In persons
Mar-17 is our estimate
Exhibit 17: Personal credit growth picked up suddenly in
March 2017…
(% YoY)
Personal credit
Exhibit 18: …and PMI for services was just in the growth
territory (above 50)
(Index)
56
PMI: Services
16.7
51.5
52
48
44
40
An index of 50 implies no change
Exhibit 19: We expect consumer non-durable goods IIP to
continue into negative territory…
(% YoY)
IIP: Consumer non-durable goods
Exhibit 20: …and food production IIP may also continue to
decline
(% YoY)
IIP: Food products
(2.4)
(3.9)
Mar-17 is our estimate
Mar-17 is our estimate
3 May 2017
5

Leading indicators for investment: Weakness continues
Exhibit 21: Cargo traffic growth picked up sharply in March
2017…
(% YoY)
Cargo traffic
Exhibit 22: …while power generation growth was also better
than previous few months
Electricity production
8.3
5.9
(% YoY)
Railways + ports
Exhibit 23: Industrial credit continued to decline but at
slower pace in March 2017…
Industrial credit
Exhibit 24: …while industrial auto sales fell for the fifth
consecutive month
(% YoY)
Auto sales
(1.9)
(3.6)
(% YoY)
Include commercial vehicles and three-wheelers
Exhibit 25: Construction activity declined for fourth
consecutive month in March 2017…
Construction
Exhibit 26: …and capital spending by central government
grew sharply
Central government's capital spending
277.3
(% YoY)
(9.7)
(% YoY)
Cement production & IIP for Non-mineral metallic products (NMMP)
Mar-17 data for IIP: NMMP is our estimate
Data for March is not out. We calculate it based on FY17RE
Source: CEIC, Various official sources, MOSL
3 May 2017
6

Exhibit 27: Diesel sales grew slightly in March 2017…
(% YoY)
Diesel sales
Exhibit 28: …and imports of capital goods declined again
Capital goods' imports
0.3
(4.6)
(% YoY)
Machinery & equipment, transport equipment, machine tools and
project goods
Exhibit 29: Expect IIP for capital goods to remain in negative
territory…
(% YoY)
IIP: Capital goods
Exhibit 30: …while manufacturing PMI moves into growth
zone (>50)
56
(Index)
Manufacturing PMI
(0.2)
54
52
50
48
46
52.5
Mar-17 is our estimate
An index of 50 implies no change
Exhibit 31: Cement production remained weak in March…
(% YoY)
Cement production
Exhibit 32: …but we expect manufacturing IIP to pick up
IIP: Manufacturing
1.4
(6.8)
(% YoY)
Mar-17 is our estimate
3 May 2017
7

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