India: 1Q14 growth expectedly tepid, keeping FY14 growth below 5%
1Q14 growth threw up few surprises. Year-on-year growth for the quarter printed at 4.6% oya exactly in line with expectations (JP Morgan and Consensus: 4.6% oya). Consequently, full year growth (FY14 ending March 2014) printed at 4.7% oya (JP Morgan: 4.6% oya) lower than the government’s advance estimate of 4.9% oya. The only surprise was that the sequential profile of GDP changed because data for the last three quarters was revised. Consequently, 1Q14 growth accelerated to 5% q/q, saar but only because 4Q13 growth was slashed to 4.2% q/q, saar on the back of up an upwardly revised 6.3% q/q, saar the quarter before.
Going forward, we forecast a steady but modest lift in growth in the coming quarters. The sharp rally in equity markets is likely to accelerate some deleveraging among corporate and a burst of government spending in the current quarter (after having to slam on the breaks in the previous quarter to meet the budgeted fiscal deficit) would provide the basis for some acceleration in the coming quarters. Those dynamics are likely to be partially offset by an appreciating currency (in nominal and real terms over the last few months) that could chip away at export competitiveness. We do not forecast a bigger lift in the immediate quarters because that would required a convincing lift in the capex cycle, which we believe could start taking hold only towards the end of the current financial year, assuming reform and executions expectations from the new government are fulfilled. Consequently we peg FY15 growth at 5.3%, up from 4.7% oya in FY14. Upside risks to our growth forecast would emanate from a looser fiscal stance, while downside risks would result if the monsoon – and therefore agricultural growth – is sub-par.
Agri provides the boost; the fiscal provides the drag
The details of the quarterly and annual print had few surprises on the production side. Agricultural growth expectedly surged in the quarter (6.3% oya) on the back of the strong winter harvest. Similarly, the fiscal drag that was envisioned materialized, with community and social services only growing at 3.3% oya. These forces broadly offset each other. Consequently GDP growth – ex agriculture and government spending – printed at 4.5% oya – almost identical to the 4.6% oya of the previous quarter.
Industrial growth did lift modestly on a sequential basis (2.9% q/q, saar from -1.4% q/q, saar) – but less than was envisioned at the start of the quarter given the hopes placed on exports and rural demand. On the services front, financial services continued to fire (8.2 % q/q/, saar) even as trade, transport and retail services extended their soft run for a fifth consecutive quarter.
The full-year dynamics were very similar: strong agricultural growth, broad-based industrial disappointment with the exception of electricity production, and strong financial services growth that pulled up the services sector.
Exports provide some lift as investment continues to slump on the expenditure side
There were no major surprises on the expenditure side either. Private consumption growth for the year edged down just a tad to 4.8% oya compared to the 5% growth of the previous year. This is a significant downshift of the 8-9% growth in the post-crisis years, reflecting slowing income growth (manifested in moderating nominal wages in the rural economy) and stubbornly high inflation that has impinged purchasing power. Government consumption slowed even further (3.8% versus 6.2% oya the previous year), reflecting the effects of the fiscal consolidation. But the real disappointment – even if expected – was the continued slump in fixed invested, which contracted (-0.1 % oya) for the first time since the global financial crisis, on the back of sub-1% growth the previous year. The only expenditure side lift was provided by net exports, with exports growing at above 8% for the year – compared to 5% last year – and imports contracting, reflecting weak domestic demand impulses.
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