Moderation in 3QFY12 GDP to 6.1% Priced In -::Citi Research

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Moderation in 3QFY12 GDP to 6.1% Priced In - Implementation of
PMO’s Recent Measures Key for FY13 Upgrades
 3QFY12 GDP slows to 6.1% — Following the 7.7% and 6.9% growth in 1Q and
2QFY12 respectively, GDP growth slowed further to 6.1%YoY during 3QFY12 ( Citi &
Consensus: 6.3%). Cumulative 9MFY12 growth was 6.9%YoY, vs. 8.1% last year. This
implies that, in order for the government to meet its first advance GDP estimate of
6.9% for FY12 (see Govt Pegs FY12 GDP at 6.9%; Trends Appear to Have Bottomed
Out, but Tough Tasks Ahead for ~7% Growth in FY13), growth in 4Q is likely to be
6.9%. The deceleration seen in growth supports our view of cumulative easing of
100bps, although oil remains a wildcard.
 GDP by Activity: Industry is the Key Drag — Weak growth was due to a slowdown in
industry, to 2.6%YoY – led by a deceleration in manufacturing (+0.4%) and a
contraction in mining (-3.1%). However, this has already been largely priced in (the
Index of Industrial Production averaged 1% during 3Q). Service sector growth held up
at 8.9%YoY, supported by healthy trends in trade and communication (+9.2%) and
financing and insurance (+9%). Agri growth remained lackluster at 2.7%YoY (see p. 2)
 GDP by Expenditure: Investments in the Red, Again — On the expenditure front,
Gross fixed capital formation posted a contraction (-1.2%YoY) for the second
consecutive quarter, a result of policy-related bottlenecks and coal/gas shortages. A
point to note is that past data has been revised down significantly (e.g growth during
1HFY12 was revised from ~3.5%YoY to 0.5%). However, consumption growth edged
higher to 5.9%YoY, with trends supported by private consumption (+6.2%) while public
consumption slowed marginally (+4.4%). Net exports widened to -7.8% of GDP as
export growth moderated, even as imports posted double-digit growth.
 Policy Thrust is Key to Outlook — As highlighted earlier, the deceleration in growth
in FY12 has been due to a collapse in investments. While we are maintaining our 7%
GDP estimate for FY13 (see p. 4) , recent steps taken by the Committee of Secretaries,
headed by Principal Secretary to the PM Singh - Pulok Chatterjee - are positive and
could result in the investment cycle recovering in the latter half of the year. Key
proposals include: (a) Fast track clearances for power and coal projects; (b) expansion
in coal production of existing mines without fresh clearance; (c) Coal India instructed to
sign Fuel Supply Agreements with power plants that have implemented PPAs.
 Policy Implications — Soft GDP data supports our view of the RBI easing the repo
rate by 100bps in 2012, but the recent rally in commodities could influence rate
decisions. Given that RBI has said that the quantum/timing of rate cuts would be
dependent on fiscal consolidation, we expect the repo rate to be cut post the budget
(on 16 March), during the RBI’s 17 April policy. However, given tight liquidity conditions
we expect the RBI to cut the CRR by 50bps in the March 15th policy.