Headline growth in line with expectations, but details sorely disappoint
4Q13 growth printed at 4.7% oya in line with expectations (Consensus: 4.7%; JP Morgan 4.8%). However, the relative stability in the year-on-year numbers (3Q at 4.8% and 4Q at 4.7%) masks the sequential loss of momentum in 4Q with growth decelerating to 5.7% q/q, saar from 6.3% the quarter before. This loss of momentum was anticipated, even as the entirely quarterly trajectory over the last three years wore a different look after sizeable historical revisions in the data that was released today.
But even as the headline numbers were line in expectations, the details were unexpectedly weak, A record harvest was expected to translate into strong agricultural growth in 4Q – a quarter in which the strong summer harvest typically manifests itself most sharply. Instead, the sector grew 3.6% oya -- well below par – and thereby created serious downside risk to the Central Statistical Organization’s (CSO) annual estimate of 4.6% growth.
Instead growth in 4Q was driven by factors that are unlikely to sustain in the current quarter. For starters, financial, insurance and business services had another blistering quarter growing at nearly 18% on a sequential annualized basis (12.5% oya). Not only is this growth on “wall street” divorced from much weaker growth momentum on “main street” – and thereby unlikely to sustain -- but, in this case, was driven by the strong deposit growth on the back off the RBI’s one-off FCNR scheme to incentivize dollar deposits. Recall, in 3Q13 banking sector growth has benefitted from the interest rate defense that caused a greater re-intermediation into banking. With these unique circumstances now behind us, financial services growth is expected to moderate – possible sharply -- in the current quarter.
Adding to this was strong government spending in 4Q that resulted in community, social and personal services (which proxies government spending) growing at 7% -- almost double the 4.2% of the previous quarter. This, too, is likely to fade – and fade sharply – in the current quarter as the government slams the brake on spending in 1Q14 to meet its revised fiscal deficit target. That said, while there is a substantial fiscal drag in the current quarter, there is likely to be a beneficial private sector response down the line from the resulting restoration of macroeconomic stability that the fiscal consolidation has helped engender.
Pegging FY14 growth at 4.6% oya
Despite some lift in the January high-frequency data, given the aforementioned dynamics, we expect 1Q14 growth to moderate sharply to 4.5% q/q, saar (from 5.7% in 4Q13). Consequently, we believe FY14 growth is currently tracking 4.6% -- below the government’s advance estimate of 4.9% oya, and our earlier forecast of 4.8% oya before today’s data release. Not only is such a level disappointing in absolute terms but particularly when you consider that it comes on the back of a downward-revised 4.5% growth in FY13. This would be the first time in 26 years that growth will print below 5% for two successive years, revealing how entrenched the slowdown is.
Industry’s woes accentuate in 4Q
Six months ago there was a belief in some quarters that 4Q13 was the quarter in which industry would begin to see some sort of a turnaround. The government had cleared a stockpile of stalled projects and investment was expected to get a boost. Rebounding rural demand after the strong agricultural harvest, and an export lift from the FX depreciation and firming global growth, were all expected to contribute to an industrial turnaround.
We were always skeptical of such a perfect storm but even we did not anticipate this quantum of industrial weakness. Industrial growth contracted both on a sequential (-1.6 % q/q, saar) and year-on-year (- 0.7% oya) basis, pulled down by a sharp contracting in mining (-5.5 % q/q/, saar) and manufacturing (-2.7 % q/q/, saar), and weakness in construction (0.6 % q/q/, saar). Only electricity production held up well, reflecting the policy and regulatory push in that sector.
The continued industrial malaise reflects the simultaneous downshifting of both consumption and investment. High rural inflation, and the consequent moderation real rural wages, likely explains why rural demand has not lifted as expected post the strong harvest. And while projects have been cleared with sustained purpose by the government, not much has translated into execution on the ground as a meaningful debt overhang constrains the infrastructure sector. All this in conjunction with India’s continuing mining woes made for sober industrial reading in 4Q13.
And while the finance and community services sectors benefited from one offs, the services sub-sector most closely linked to the real private economy -- trade, hotels, transport & communication – has reflected the industrial weakness, growing at 4.3% oya – just slightly above the level of the last two quarters – but much below the near 6% levels from a year ago.
External demand saves the blushes
Quarterly data on the expenditure side, given the volatile revisions it is subject too, needs to be taken with a grain of salt. That said, it revealed familiarly depressing themes relating to domestic demand. The 3Q data had raised some hope: the mix of consumption had turned for the better (higher private consumption and lower government consumption), fixed capital formation growth had turned positive after two quarters of contraction, and exports had lifted sharply. The hope was a corner was being turned. But, alas, these hopes were belied. Private consumption growth slumped back to 2.5% (half the levels of the previous year) and fixed investment went back to its contractionary ways. Only external demand saved the blushes. Export growth remained healthy, even as it tailed off slightly compared to 3Q. But more than offsetting that was the fact that imports contracted, such that “net exports” was the only real driver of growth in 4Q. However, continuously relying to global growth to save the day is to live on a wing and prayer.
Instead, the fervent hope must be that the recent lift in January’s high frequency data (trade, PMIs) don’t flatter to deceive. Else, the forecasted moderation in 1Q14 momentum could get even more disconcerting.
India: real GDP using factor costs
| |||||
% oya
|
Oct-Dec 12
|
Jan-Mar 13
|
Apr-Jun 13
|
Jul-Sep 13
|
Oct-Dec 13
|
Overall
|
4.4
|
4.4
|
4.4
|
4.8
|
4.7
|
Agriculture and allied
|
0.8
|
1.6
|
2.7
|
4.6
|
3.6
|
Industry
|
1.7
|
2.1
|
0.2
|
2.3
|
-0.7
|
Mining
|
-2.0
|
-4.8
|
-2.8
|
-0.4
|
-1.6
|
Manufacturing
|
2.5
|
3.0
|
-1.2
|
1.0
|
-1.9
|
Electricity, gas and water supply
|
2.6
|
0.9
|
3.7
|
7.7
|
5.0
|
Construction
|
1.0
|
2.4
|
2.8
|
4.3
|
0.6
|
Services
|
6.9
|
6.3
|
6.7
|
6.0
|
7.6
|
Trade, transport and comms
|
5.9
|
4.8
|
3.9
|
4.0
|
4.3
|
Financial and business services
|
10.2
|
11.2
|
8.9
|
10.0
|
12.5
|
Community, social and personal services
|
4.0
|
2.8
|
9.4
|
4.2
|
7.0
|
India: real GDP using factor costs
| |||||
%q/q, saar
|
Oct-Dec 12
|
Jan-Mar 13
|
Apr-Jun 13
|
Jul-Sep 13
|
Oct-Dec 13
|
Overall
|
6.1
|
4.7
|
2.2
|
6.3
|
5.7
|
Agriculture and allied
|
3.8
|
1.7
|
4.3
|
8.6
|
-0.3
|
Industry
|
11.6
|
5.1
|
-12.6
|
7.3
|
-1.6
|
Mining
|
-1.4
|
-1.0
|
-0.7
|
1.7
|
-5.5
|
Manufacturing
|
10.2
|
6.8
|
-20.5
|
11.7
|
-2.7
|
Electricity, gas and water supply
|
12.3
|
-7.4
|
14.5
|
12.1
|
2.5
|
Construction
|
18.1
|
6.4
|
-4.3
|
-0.7
|
0.6
|
Services
|
4.3
|
5.3
|
9.1
|
5.3
|
10.5
|
Trade, transport and comms
|
5.7
|
1.5
|
2.2
|
6.7
|
6.4
|
Financial and business services
|
7.4
|
10.5
|
8.8
|
13.2
|
17.9
|
Community, social and personal services
|
-2.9
|
5.7
|
25.4
|
-8.0
|
7.9
|
Real GDP: expenditure side
| |||||
% oya
|
Oct-Dec 12
|
Jan-Mar 13
|
Apr-Jun 13
|
Jul-Sep 13
|
Oct-Dec 13
|
Overall
|
5.3
|
4.9
|
2.4
|
5.6
|
4.6
|
Private Final Consumption Expenditure
|
5.1
|
5.1
|
1.9
|
3.0
|
2.5
|
Government Final Consumption Expenditure
|
4.5
|
1.8
|
9.6
|
1.5
|
4.0
|
Gross Capital Formation
|
6.1
|
4.0
|
4.0
|
5.6
|
-1.9
|
Gross Fixed Capital Formation
|
4.4
|
3.3
|
-3.7
|
1.8
|
-1.1
|
Exports
|
-1.7
|
-1.4
|
-1.2
|
14.8
|
11.4
|
Less Imports
|
3.6
|
2.3
|
2.6
|
2.1
|
-3.8
|
Real GDP: expenditure side
| |||||
%q/q, saar
|
Oct-Dec 12
|
Jan-Mar 13
|
Apr-Jun 13
|
Jul-Sep 13
|
Oct-Dec 13
|
Private Final Consumption Expenditure
|
10.3
|
9.1
|
-16.9
|
13.1
|
6.5
|
Government Final Consumption Expenditure
|
-8.0
|
-1.1
|
48.1
|
-22.0
|
3.6
|
Gross Capital Formation
|
14.9
|
-0.3
|
3.3
|
5.6
|
-15.2
|
Gross Fixed Capital Formation
|
15.1
|
-0.1
|
-23.1
|
22.5
|
1.2
|
Exports
|
-11.0
|
8.3
|
10.7
|
59.9
|
-17.9
|
Less Imports
|
1.7
|
7.3
|
-6.2
|
6.6
|
-19.9
|
No comments:
Post a Comment