Edelweiss, GDP growth slows to 8.2% in Q3FY11

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Real GDP grew lower than expected at 8.2% Y-o-Y in Q3FY11 largely due to moderation in industrial growth. Although some moderation in industrial activity was expected  on back of weak IIP data in recent months, the dip was much sharper than expected. However, on the positive side, agriculture grew strongly at 8.9% on back of strong kharif crop and some base effect. Services also registered healthy growth, expanding at 8.8% Y-o-Y compared to 8.2% in Q3FY10. On the demand side, private consumption growth continued to remain firm, although investment growth dipped during the quarter due to base effect and possbily as a result of higher cost of funding and tight liquidity conditions prevaling in the economy.

Real GDP grew lower than expected at 8.2% Y-o-Y in Q3FY11 largely due to moderation in industrial growth. Although some moderation in industrial activity was expected  on back of weak IIP data in recent months, the dip was much sharper than expected. However, on the positive side, agriculture grew strongly at 8.9% on back of strong kharif crop and some base effect. Services also registered healthy growth, expanding at 8.8% Y-o-Y compared to 8.2% in Q3FY10. On the demand side, private consumption growth continued to remain firm, although investment growth dipped during the quarter due to base effect and possbily as a result of higher cost of funding and tight liquidity conditions prevaling in the economy.

Going forward, we expect agriculture growth to maintain pace, but industrial growth to decline further, reflecting the effects of monetary tightening. Nonetheless, we expect the RBI to hike policy rates ~50-75bps in the current calander year as inflation is much higher than the central bank’s comfort zone.

n  Q3FY11 GDP grows lower than expected

India’s real GDP grew ~8.2% Y-o-Y in Q3FY11, lower than our and consensus expectations of ~ 8.6%. Decline in manufacturing growth, also reflected in the IIP number, led to lower–than-expected headline number. However, strong growth in agriculture helped GDP grow higher than 8%. Services also registered healthy growth, expanding at 8.8% Y-o-Y compared to 8.2% in Q3FY10. On the demand side, private consumption and exports posted strong growth. However, investment growth has dipped to a certain extent.

n  Strong rebound in agriculture and weak pace in manufacturing

Industrial growth came lower at 6.4% Y-o-Y compared to 9.8% last year, primarily due to moderation in the manufacturing sector. Moderation in industrial growth is also reflected in monthly IIP data. Further moderation is broad based, as lower growth was seen across all sectors. Going forward, while pick up in exports will be supportive of industrial production, weakness in investment activity may negatively influence industrial production trends. Overall, we expect further moderation in industrial growth in the coming months.

Agriculture recovered sharply, growing 8.9% Y-o-Y in the quarter under consideration against -1.5% in Q3FY10. This is a reflection of base effect and a healthy kharif season production of cereals, pulses and oil seeds on the back of normal South-West monsoon season compared to the previous one.

Services sector continued to register healthy growth, expanding at 8.8% Y-o-Y on the back of higher growth in ‘financing, insurance, real estate and business services’ and ‘social and personal services’ segments. However, ‘trade, hotel, transport & communication’ segment, which was earlier posting strong growth momentum, registered slower growth compared to Q3FY10. Going forward, the services sector is expected to maintain healthy expansion pace as reflected in some lead indicators.