GDP - Shows no industry, slips below 7% :: Edelweiss

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As expected, real GDP expanded ~6.9% YoY in Q2FY12, but much slower than 7.7% in Q1FY12. Industry grew by a paltry 3.2% YoY while services and agriculture sectors maintained robust pace at 9.3% and 3.2% respectively. Industry is clearly bearing the brunt of ongoing policy hurdles, high cost of capital and lingering uncertainties in the global economy while services seem to be largely immune to the adverse business cycle conditions – a phenomenon observed during 2008-09 down turn as well. Notably, investments slumped to 1.2% YoY despite the resilience in services (which account for ~40% of investments), suggesting that the investment downturn is largely industry-centric.  Meanwhile, private consumption also slowed to 5.9% (against 6.3% earlier) although net trade was a strong contributor to the GDP growth as exports maintained vigor even as imports eased.

Going ahead, any improvement in the domestic business environment appears unlikely whereas global financial market conditions are deteriorating further. Accordingly, a slump in investment activity is likely to continue with consumption moderating more. Indeed, our lead indicator, EELII suggests that non-agri economic activity in Q3 would be no better than Q2. Accordingly, we are downgrading our FY12 GDP forecast to ~7% from ~7.6% earlier, largely on account of a sharper than expected downturn in the industry. We reiterate that RBI is done with its monetary tightening in the current cycle.