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Real GDP grew at a brisk pace of 8.9% Y-o-Y in Q2FY11 despite high base
effect; this, along with upward revisions in previous data suggests that the
economic momentum remains robust. On the activity front, agriculture and
manufacturing picked pace while on the demand front, strength in private
consumption surpised on the upside. Going ahead, we expect agriculture
growth to maintain pace while non-agri GDP, particularly industry could
moderate, reflecting the effect of past monetary tightening. Some
components of the WPI basket are showing stickiness but the broader
inflation trajectory is softening. We continue to believe that the case for
near-term pause in the policy stance remains intact.
Q2FY11 GDP grows faster than expected
India’s real GDP grew ~8.9% Y-o-Y in Q2FY11, higher than our and consensus
expectations of 8.2% Y-o-Y. Strong rebound in agriculture and continued pace of
expansion in manufacturing sector contributed to the impressive headline number.
Services also registered healthy growth, although it was a tad lower than Q2FY10,
reflecting the high base effect. Overall, non-agri GDP grew ~9.5% Y-o-Y compared to
9.8% Y-o-Y in Q2FY10 and ~10% in the previous quarter. On the demand side,
strengthening private consumption led the economic momentum.
Strong pace in manufacturing and rebound in agriculture
Industry grew a healthy 8.9% Y-o-Y, primalrily led by strong momentum in the
manufacturing sector. Meanwhile, Q1FY11 data for manufacturing and construction
was revised higher. However, manufacturing sector growth is not yet fully broadbased
as reflected in the monthly IIP data and the growth in six core industries
(infrastructure sector) continues to lag IIP growth. Going forward, while pickup in
domestic private consumption will be supportive of industrial production such as nondurables
goods production, weakness in the export sector (led by real appreciation in
INR and weaker external demand) may negatively influence industrial production
trends. Overall, we expect some moderation in IIP growth in the coming months.
Agriculture recovered sharply, growing 4.4% Y-o-Y in the quarter under consideration
against 0.9% in Q2FY10. This is a reflection of a healthy Kharif season production of
cereals, pulses and oil seeds on the back of normal South-West monsoon season
compared to the previous season, although somewhat deficient rainfall witnessed in
some key rice producing states such as West Bengal, Bihar and Jharkhand and floods
in parts of Punjab and Haryana, could have impacted the paddy output.
The services sector expanded 9.8% Y-o-Y on the back of increased growth
momentum in the ‘trade, hotels, transport and communications’ segment compared to
Q2FY10, although ‘financing, insurance, real estate and business services’ and
community services posted slower growth compared to Q2FY10, largely reflecting a
high base effect. While the service sector is expected to maintain healthy expansion
pace, some lead indicators of the services sector such as goods and passenger traffic
at ports and airports, cement dispatches are moderating.
Private consumption regains pre-crisis growth momentum
On the demand side, private consumption expenditure surprised on the upside, growing
at a a robust pace of 9.3% Y-o-Y in Q2FY11 against 6.7% in Q2FY10. At the same time,
Q1FY11 private consumption growth has been revised higher to 7.8% Y-o-Y compared to
3.8% estimated earlier. In sum, private consumption seems to have regained its precrisis
growth momentum. While this strength is reflected in the strong growth in the
consumer durables segment of IIP data; weakness in consumer non-durables production
through April-Aug seems to be at odds with this strength in private consumption.
Meanwhile, gross fixed capital formation grew ~11% in Q2FY11 against 4% in Q2FY10.
What is notable is that the Q1FY11 number has been revised sharply higher to ~19%
compared to 7.8% estimated earlier, suggesting that the investment activity is underway
in the economy
RBI to remain on hold at least for the time being
The stronger-than-expected GDP growth numbers do not derail the case for near-term
pause in the monetary tightening by RBI. The IIP numbers are likely to be on the softer
side, inflation is on an easing trajectory (although potential rise in global commodity
prices do pose a risk) and domestic liquidity conditions have remained tighter than the
central bank’s comfort in recent weeks. Besides, external environment both from
economy as well as financial markets perspective remains uncertain. While industry
related indicators in the US have improved lately, the US housing market and labour
market remain particularly weak and output gap remains high. Europe is witnessing
revival of sovereign debt concerns while China is taking aggressive measures to curb
inflation and excessive lending in the economy. Against this backdrop, we believe that
the RBI will prefer to wait and watch the evolving macroeconomic scenario domestically
as well as globally over the next 2-3 months.
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