National Accounts- Output on a path of moderation :: Kotak Sec

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Economy
National Accounts
Output on a path of moderation Growth is likely to have moderated in 2QFY11E
from 8.8% in 1QFY11 as the economy comes off its cyclical highs. The softening in
industrial output is likely to have been balanced by better agricultural output and the
strong services sector. We expect 2QFY11E GDP growth to be at 8.2% and the profile
for the rest of the fiscal to point to an output growth of 8.4% in FY11E.




Agricultural sector likely to balance out weaker industrial sector
After a very weak monsoon in FY2010, which resulted in poor crop output, this year’s strong
monsoon signaled a return to normal crop output. Apart from the increase at the levels, the
growth rate too will get a boost from favorable base effects. For 2QFY11E though, the kharif
produce is unlikely to have much effect in pushing up the growth rate. The kharif (summer crop)
produce will kick in from next quarter onwards along with rabi (winter crop) produce in the
subsequent quarters. However, despite the above positives, some concerns have been raised
recently due to late November rains in certain parts of the country that are likely to have had a
negative impact on certain cash crops such as cotton, rubber, coconut, tea etc. Potato and onion
crops in Maharashtra also have faced some problems with late rains. On the flip side, we expect
industries to see weak performance in this quarter, in line with the IIP numbers. Mining and
quarrying will be weak in the quarter and not much upside is expected from the manufacturing
side either. Services will continue to hold up though we expect some weakness in the construction
sector and ‘community and personal’ services sector.

Demand side indicators however are still strong
On the demand side, we do not think there should be much of a concern in terms of headline
GDP growth. Credit growth is currently strong at around 22% and should end the year with a
growth of around 18-20%. This has been somewhat aided by the 3G+BWA auction proceeds but
the underlying credit demand remains stable. Project announcements by the companies also
remained robust while sales growth indicated a healthy trend in Q2FY11. CAD is expected to
remain high, not only because of lower exports and higher oil imports. Non-oil import growth has
also been robust and this points towards a higher absorptive capacity in the economy. Rural
demand is likely to stay robust with better agricultural growth likely.

FY11E GDP growth likely to be at 8.4%; FY12E lower at 7.8%
We expect GDP growth in FY11E 8.4% to be higher than 7.4% last year (see Exhibit 1) with
2QFY11E at 8.2%. Agricultural output and strong services sector is likely to pull up growth in
Q2FY11. However, we expect manufacturing sector growth to moderate in 3QFY11 and 4QFY11
on account of higher food prices curtailing demand, higher interest rates in the economy and
weak export growth. The base effect from last year is also expected to bring down growth.
Further out into FY12E, we are likely to see a moderation in the growth rate on the back of the
normalizing agricultural output and also a moderation in industrial output. The global situation is
expected to continue to be weak with little upward bias for growth. This is likely to negatively
affect export growth. With food supply chains in India and globally remaining shaky, food prices
could remain on the higher side. RBI could react harshly to such a development as they have
already raised the ante against protein-intake led inflation. The other risk that is developing is
through the liquidity channel—with European debt concerns unlikely to die out soon and newer
risks emerging on this space, there are chances that the global investors are more in a risk-off
mode. This is likely to limit overseas flows into India, hence, lower intervention by RBI and lack of
resources for growth. We therefore see overall GDP growth in FY2012 moderating to 7.8%.