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1 Macroeconomic Update: GDP Q3 FY14, Fiscal Balance & Core Sector Highlights: GDP for Q3 FY14 came in at 4.7% compared to downwardly revised 4.4% in Q3 FY13. Agriculture GDP grew less than anticipated at 3.6% (0.8% in Q3 FY13). Industry GDP in consonance with the negative IIP for Q3 FY14 witnessed contraction of 1.2% (2.0% in Q3 FY13). Services GDP grew at 6.7% after registering sub 5% growth rate in the previous quarter (6.1% in Q3 FY14) Gross Domestic Product (GDP) for Q was estimated at Rs 14,78,152 Cr which implies a growth of 4.7% over the same quarter last year. The number was well below market expectations of close to 4.9% growth rate. This was largely on account of slower than expected growth in agricultural sector accompanied by de-growth in Industry GDP. Bansi Madhavani bansi@stcipd.com Priyanka Sachdeva priyanka@stcipd.com I. Sector-Wise Agriculture GDP: The agriculture sector grew at 3.6% as compared to 0.8% in the corresponding period of previous year. While good kharif harvest has aided the agricultural growth rate, this number was lower than previous quarter estimate of 4.6% suggesting the slowdown in its pace. This year agriculture GDP is expected to grow at 4.6% according to the advance estimates released by CSO driven by record production of foodgrains. However, lower than anticipated growth rate for this quarter may pose downside risk to these estimates. Industry GDP: Industry GDP registered de- growth of 1.2% as compared to growth rate of 2.0% for Q This was largely expected given the contraction in factory output as reflected in the IIP number. Even though electricity grew at a positive rate for Q3 FY14, both mining and manufacturing dragged down the Industry GDP. 1

2 Table 1: Sector-wise Growth (in %) Q3 FY13 Q3 FY14 Agriculture Industry Mining Manufacturing Electricity Services Construction Trade, Hotels & Restaurants Financing & Insurance Community Services GDP Source: CSO Services: The services GDP grew at 6.7% for Q3 FY14 as compared to 6.1% witnessed in Q3 FY13. Growth in services sector is driven by upsurge in financing, insurance, real estate and business services (12.5% for Q3 FY14) and community, social and personal services (7.0% for Q3 FY14). Construction activity which grew at mere 0.6% for Q3 FY14 acted as a major dampener for growth of services sector. II. Expenditure-Wise Calculated using expenditure method, GDP at market price recorded a growth of 4.6% in Q3 FY14 as compared to 5.3% in Q3 FY13. Table 2: GDP Expenditure-Wise Classification Growth (in %) % of GDP Q3 FY13 Q3 FY14 Q3 FY13 Q3 FY14 Government final consumption expenditure Private final consumption expenditure Gross fixed capital formation Change in stocks Valuables Exports Less: Imports Discrepancies GDP (at Market Price) Source: CSO Government expenditure grew at 4.0%; a tad lower than the growth of 4.5% in Q3 FY13. However, the number was sharply higher than the growth rate of 1.5% seen in the previous quarter despite the government s attempt at trimming down both plan and non plan expenditure to adhere to its fiscal deficit target. The impact of sharp cutback in government spending is likely to be seen in fourth quarter of FY14. Private final consumption expenditure grew at a modest pace of 2.5% as compared to 5.1% in Q3 FY13. However this number is higher than previous quarter estimate where private consumption grew by 1.5%. Consumption driven growth has witnessed a sharp turnaround 2

3 this year with the prevalence of higher interest rates as well as high inflation scenario. This corroborates with the IIP number where consumer goods both durables and non durables have been hovering at low levels reflecting muted consumer sentiments. Gross fixed capital formation witnessed de-growth of 1.1% as compared to expansion of 4.4% for Q3 FY13. The impact of large scale clearances of projects by CCI has failed to materialize for now on account of policy uncertainty ahead of general elections. Further, even though major approvals have been granted by central government, state government s approvals as well as implementation may take a while before it has any significant impact on investment cycle. Exports registered double digit growth rate of 11.4% as compared to deceleration of 1.7% in Q3 FY13. Growth rate of exports was anticipated on account of rupee depreciation that has enhanced the competitiveness of exports amidst pick up in global recovery. However, sluggish growth and weak demand situation has constrained the growth of imports which have declined by 3.8% as compared to positive growth of 3.6% for Q3 FY13. Valuables which largely reflect the imports of gold have contracted for the second consecutive quarter on account of high import and other restrictions on gold intended to contain CAD at comfortable level. Valuables declined by 11.9% as compared to growth rate of 43.6% seen in the corresponding quarter of previous year. Conclusion India s GDP growth for Q3 FY14 does not seem to reflect any major development for this year. Agriculture sector has been looked forward as the linchpin of growth for this year amidst favorable monsoons. While it is likely to support GDP number for the last quarter of FY14, it is plausible that the growth rate may not be large enough to support advance estimates released by CSO (4.9% of FY14). Industrial sector has been reeling under structural bottlenecks as well as higher interest rate scenario that have forestalled major investment projects which have turned unprofitable. A significant improvement can only be seen post the general elections which will boost the business confidence to undertake new investment. Even though services sector has picked up in this quarter, cutback in government spending poses downside risk to its growth rate for the last quarter of FY14. On expenditure front, domestic demand condition continues to weigh down the GDP number and may not pick up sharply in the last quarter. Both consumption and investment demand has taken a hit because of persistent inflation and high interest rates. A sharp revival of demand conditions looks unlikely for this financial year. However, improvement in external demand conditions led by pick up of activity in major advanced economies may provide support to the GDP number. Clearly, there are various downside risks to advance estimates of GDP at 4.9%. Further, the growth rate of GDP should be close to 5.5% in Q4 FY14 so as to achieve the target of 4.9% for FY14 which is highly optimistic at this juncture. 3

4 Fiscal Balance (Apr-Jan FY14) Highlights: Fiscal deficit in ten month period of Apr-Jan stood at Rs 5.33 lakh Cr (101.6% of Revised Estimate of Rs 5.25 lakh Cr). Total receipts collection amounted to Rs 7.37 lakh Cr (69.2% of RE); while total expenditure stood at Rs 12.7 lakh Cr (79.8% of RE). Revenue Deficit was 102.3% of year s RE, while Primary Deficit widened to 171.3% of the year s RE. In the interim budget , the FM Chidambaram underlined his firm resolve of adhering to redline on fiscal deficit at 4.8% of GDP. The fiscal deficit, to be sure, is expected to be curtailed at 4.6% as per FY14RE. While the data for ten months shows some slippage on fiscal front, revenue mop-up in upcoming couple of months should ensure the fiscal deficit target is achieved by March. 1. Receipts Side Collection under total receipts was 69.2% of FY14RE, lower than 71% collection noted for the same period previous year. While revenue receipts have stayed on modest pace, non debt capital receipts have failed to pick-up meaningfully. The advance tax collection (deadline for fourth installment being on 15-Mar) should push the overall collection under tax revenues closer to downwardly revised FY14 estimate of Rs 8.36 lakh Cr (from Rs 8.84 lakh Cr FY14BE). Going forward, collection under non tax revenue is expected to remain robust considering that the government would receive payment from spectrum auction (~Rs 19,000 Cr). Also in pipeline is disinvestment of Indian Oil Corporation (a 10% stake is expected to earn ~ Rs 5,000 Cr) and 5% stake sale in BHEL (expected to yield ~ Rs 1,200-1,400 Cr). 2. Expenditure Side Expenditure momentum has noted marked deceleration with the overall expenditure staying under 80% of downwardly revised estimate of Rs 15.9 lakh Cr. The revision in overall expenditure has largely been on account of ~ Rs 80,000 Cr savings in Plan expenditure. Outgo on account of plan expenditure has remained at 77.6% of FY14RE. On the other hand, non-plan expenditure is firm at 80.8% of FY14RE. Interest payments and subsidy burden have kept the overall non-plan expenditure at elevated level. As a result, the expenditure side continues to remain constrained. Conclusion While the centre has exceeded the fiscal deficit in ten months, it is largely expected that due collections in Feb and March would keep the government on path of reining fiscal deficit at 4.6% of GDP. Primary deficit, the non interest-payment component of fiscal deficit, has on a sustained basis remained above the estimated levels. It is imperative that a healthy moderation is witnessed in this component. For FY15, the fiscal deficit is pegged at 4.1% of GDP. While the fiscal consolidation is certainly laudable, increased emphasis should be on quality of consolidation for sustainment. 4

5 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan March 2014 Core Industries (Jan-14) The eight core industries registered a growth of 1.6% for Jan-14 as against an 8.3% growth for Jan- 13. For the period Apr-Jan, the cumulative growth of the core industries is a weak 2.4% Y-o-Y Trend (%) M-o-M Trend (%) The manufacturing activity has notoriously remained under stress for most part of the year. Subdued investment climate, policy logjam and uncertain political and economic scenario has debilitated the sector. A summary of industry-wise performance is as under: Table 3: Core Sector Industries Annual Growth Rates (%) Jan-14 Apr-Jan FY14 Overall Growth Rate Coal Crude Oil Natural Gas Petroleum Refinery Products Fertilizers Steel Cement Electricity Source: Office of Economic Adviser Out of the eight industries, five industries stayed in positive growth zone for the month. Natural gas noted its 38 th month of consecutive negative growth. For the period Apr-Jan, the growth now stands at (-) 14.1%. Amongst the positive growth sectors, electricity led the category registering an annual growth of 5.7% for the month. However, positive impact of spillover of electricity generation growth has failed to materialise on overall manufacturing sector. For FY14, hopes for any significant revival in core industrial sector seems optimistic given current scenario. Downside risks to FY14 industry GDP (excluding construction), therefore, are pronounced with the industrial GDP already registering negative growth of 1.2% for Q3FY14. 5

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