02 December 2010
Q2 GDP: Services to the fore:: Ambit
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Q2 GDP: Services to the fore
India’s GDP growth for 2QFY11 came in at an impressive 8.9% YoY
propelled by ‘services’ on the supply-side and ‘private consumption
expenditure’ on the demand-side. The domestic business cycle has
clearly turned upward and India should hit the sweet spot of high GDP
growth and low inflation by 1QFY12 — a macroeconomic environment
which has been historically characterized by high positive stock
returns.
The supply side
Agricultural sector: (5-yr average share in GDP: 16%; 5-yr average YoY
growth: 3.1%.) A low base and improved rainfall (up 19% YoY in 2QFY11)
pushed agricultural growth up to 4.4% YoY in 2QFY11 – the strongest in 14
quarters (exhibit 1).
Industrial sector: (5-yr average share in GDP: 28%; 5-yr average YoY
growth: 8.9%.) Industrial growth moderated to 8.9% YoY in 2QFY11 albeit to
a lesser extent than what the IIP numbers suggested (exhibit 1). Whilst mining,
electricity, gas and water supply slowed down on a YoY basis, manufacturing
and construction grew faster than in 2QFY10. Separately, expansion in the
core sector rose to 7% yoy in October – a seven month high suggesting that
the industrial sector is in robust health.
Services sector: (5-yr average share in GDP: 55%; 5-yr average YoY growth:
10%.) The services sector expanded at 9.8% YoY in 2QFY11 thus contributing
a stellar 65% to the growth process this quarter (exhibit 1). The sector’s growth
was powered by a 12%+ YoY growth in trade, hotels, and transport and
communications segment. Finance, insurance, real estate and banking sectors
expanded at a 4-quarter high of 8.3% YoY in 2QFY11.
The demand side
Private final consumption expenditure (PFCE): (5-yr average share in GDP:
59%; 5-yr average YoY growth: 7.8%)
Private demand recovered decisively to record a YoY growth rate of 9.3% in
2QFY11 - the highest since FY08 (exhibit 2). This is particularly impressive in the
light of the 9% average monthly WPI inflation recorded during this period and is
largely explicable by the rebound in agriculture on the supply side. PFCE was the
main driver of growth from the demand side in 2QFY11 contributing 54% to the
GDP growth process.
Government final consumption expenditure (GFCE) (5-yr average share in
GDP: 11%; 5-yr average YoY growth: 10.9%)
GFCE contributed less than 10% to GDP growth in 2QFY11. GFCE expanded at
9.2% YoY in 2QFY11 (exhibit 2), a tad lower than its long-term average as the
Union government stages a calibrated fiscal policy exit.
Gross fixed capital formation (GFCF) (5-yr average share in GDP: 32%; 5-yr
average YoY growth: 11.4%)
The investment cycle upturn that began in 3QFY10 moderated (exhibit 3) as
corroborated by the volatility in the capital goods production data. GFCF expanded
at 11.1% YoY in 2QFY11 down from 19.0% YoY in 1Q1FY11 but higher than 4.0%
YoY in 2QFY10. Additionally, the YoY growth change in stocks remained positive
thus indicative of an upward turning inventory cycle.
Investment implications
The Q2 GDP report suggests that the domestic business cycle has clearly turned
upward (exhibit 4). Given that the average GDP growth rate for 1HFY11 was
recorded at a stunning 8.9% YoY (post-revisions in 1QFY11 numbers) and given
the YoY improvement in the monsoons situation, GDP growth rate for FY11 is
likely to be significantly ahead of 8% YoY. Domestically, India will hit the sweet
spot of high GDP growth rate and low WPI inflation by 1QFY12 – a
macroeconomic environment which is historically characterized by high positive
equity market returns
Monetary policy implications
We do not expect the Reserve Bank of India (RBI) to hike the repo or reverse repo
rate at the next mid-quarter monetary policy scheduled for mid-December 2010
given its explicit wording in the last monetary policy review suggesting a temporary
halt. However, in view of the robust GDP growth numbers released earlier today,
we now see a possibility that the RBI could revert to its monetary policy tightening
agenda by end-January 2011. Separately, liquidity enhancing measures will
continue to be in force until the extent of the deficit at the RBI’s repo window ebbs.
Given the decisive emergence of the Indian economy from the recession of FY09,
managing capital inflows and rupee appreciation will be the next blip on the RBI’s
radar should global liquidity continue flowing into India.
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