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1 Macroeconomic Update: GDP and Fiscal Balance Highlights: GDP: Q1 FY15 Growth for first quarter of the year jumped to nine quarter high of 5.7% as against 4.6% in the previous quarter. The surge in overall GDP was on back of rebound in performance of industrial sector (rose by 4% as compared to -0.5% in the previous quarter). Agriculture sector registered growth at 3.8%, while services (including construction) grew at 6.6%. Trends in Annual GDP (%) Component-wise GDP trend (%) Bansi Madhavani Priyanka Sachdeva Source: MOSPI, PD Research Quarterly GDP at factor cost at constant prices stood at Rs lakh Cr for Q1 FY15 compared to Rs lakh Cr in the Q1 FY14, translating into growth of 5.7% annual pace. As per the current market prices, the nominal GDP for Q1 FY15 stands at Rs lakh Cr, a growth of 11.6% from previous year. Sector-wise Classification Agriculture growth held steady at its twelve quarter average of 3.8%. Though lower than previous quarter s 6.3% annual growth, the Q1FY15 was held above the first quarter average growth in past five years. Monsoon deficiency and the lack of proportionate spatial distribution are expected to impact the agricultural growth in coming quarters. Overall, the agricultural sector had recorded stellar performance in the previous fiscal (average 4.7% for FY14). Some headwinds to this growth rate can moderate the overall agriculture GDP for FY15. Industrial sector rebounds to nine quarter high of 4%. Excluding construction, the industrial sector recorded strong performance on back of double digit growth in electricity, gas and water supply. As corroborated by the IIP growth trend, the electricity, gas and water supply grew at 10.2%. Mining, after being in the contraction phase for two years, resurged to grow at 2%. Manufacturing sector grew at 3.5% for the quarter. 1

2 Services sector continues to lead sectoral performance growing at 6.6%. Services, which form the largest component of GDP composition, registered a strong growth aided by double digit growth in financing, insurance, real estate and business services (10.4%). Community, personal and social services, which act as a proxy for government spending and its contribution to overall growth, grew at 9.1%. Following the tight spending discipline adhered in last quarter of the fiscal year, this sector gets boost with release of fresh spending in the beginning of year. To smoothen this asymmetry, we calculate the services GDP ex community, social, personal service which stands at 6%. This highlights that despite forming only ~19% of services; the government spending has contributed 60 bps to the headline services growth. Table 1: Annual Growth Rates (%) Q1 FY14 Q1 FY15 1. Agriculture, forestry & fishing Agriculture GDP Mining & quarrying Manufacturing Electricity, gas & water supply Industry GDP Construction Trade, hotels, transport & communication Financing, insurance, real estate and business services Community, social & personal services Services GDP GDP at factor cost Source: MOSPI, PD Research Expenditure-wise Classification On the expenditure side, the GDP at market prices ( prices) stood at Rs lakh Cr, growing at 5.8% compared to previous year s Q1 growth of 4.2%. Table 2: Expenditure Components as % of total GDP at market prices Q1 FY14 Q1 FY15 Government Final Consumption Expenditure Private Final Consumption Expenditure Gross Fixed Capital Formation Change in Stocks Valuables Exports of goods and services Less: Imports of goods and services Discrepancies Expenditure on GDP Source: MOSPI, PD Research 2

3 Government final consumption expenditure grew at 12.4% with flush of fresh spending, characteristic of first quarter of fiscal year. Private final consumption expenditure grew 5.6% to form 61.7% of the total expenditure of GDP. The consumption trends as seen in the IIP print has failed to show any signs of encouragement. The manufacturing of overall consumer goods segment contracted 3.6% for Q1 FY15. Gross fixed capital formation which represents the investment expenditure grew at 7% compared to (-) 0.9% in the previous quarter and (-) 2.8% for Q1 FY14. This was anticipated given the gradual recovery of the industrial sector. Exports continued to showcase impressive performance with double digit growth at 11.5% in continuation with 10.5% in previous quarter and sharp improvement over contraction of 2.8% in Q1 FY14. On the other hand, imports contracted by 0.7% lower than de-growth of 3.7% seen in the previous quarter. With the Indian economy gaining traction gradually, imports can be expected to rise in near term. Concluding Remarks As a pleasant surprise, the GDP growth at 5.7% stood higher than market consensus estimates at 5.3%. With the recovery signs of growth in horizon, growth in upcoming quarters is expected to consolidate at around current level. The RBI, in its assessment has maintained the growth projection for FY15 between 5%-6% with risks equally balanced at both ends of 5.5%. Going forward, the agriculture growth may witness some moderation given the monsoon deficiency and lack of adequate spatial distribution of rainfall. The industrial sector, on the other hand, can spearhead the growth outlook and emerge as positive development. The trend in IIP growth has shown positive signs in past few months. Sustenance of such trend augurs well for overall industrial GDP and is expected to hold up total GDP growth. A continued resolve by the government to debottleneck infrastructural hindrances and ensure speedy project clearances is expected to have positive spillover impact on both services and industrial sectors. As a whole, we still maintain our outlook on GDP growth to be in range of 5.3%-5.5% for the full year. While the recent release of growth number markedly points towards signs of recovery, the extent of recovery is expected to gain traction only after couple of quarters. The RBI has time and again reiterated the importance of managing inflation and inflation expectations as a complementary measure to support growth. Inflation, as measured by the GDP deflator, has moderated to 5.8% for Q1 FY15 compared to previous year s average of 6.5%. This demonstrates with growth largely on expected trajectory and CPI inflation following the glide path in near future, the RBI would stress importance of maintaining real positive interest rates for the savers. Consequently, we expect the RBI to hold status quo on policy rates for foreseeable future barring any sharp deviations in domestic or external conditions. The bond market, therefore, will continue to track developments on the inflation front and inherent demand-supply dynamics. As such, we expect the benchmark 10 Yr G-Sec to remain in broad range of 8.5%-8.6% in absence of any fresh triggers. 3

4 Fiscal Balance: Apr-Jul FY15 Highlights: The fiscal deficit for Apr-Jul FY 15 cumulated to Rs 3.25 lakh Cr (61.2% of the BE). Receipts collections totaled Rs 1.79 lakh Cr (14.2% of the BE) while total expenditure stood at Rs 5.04 lakh Cr (28.1% of the BE). Revenue deficit at Rs 2.66 lakh Cr exhausted 70.4% of the BE while primary deficit at Rs 2.06 lakh Cr breached to reach 198.1% of the BE. Table 3: Provisional Fiscal Balance FY14 (in Rs Cr) Apr-Jul FY 15 (RE) % of BE FY 15 % of BE FY Revenue Receipts 1,75, % 16.7% Tax Revenue 1,46, % 16.4% Non tax revenue 28, % 18.0% 2. Non Debt capital receipts 3, % 6.6% Total Receipts 1,79, % 16.1% 1. Non plan Expenditure 3,71, % 33.5% Interest payments 1,18, % 23.3% 2. Plan Expenditure 1,32, % 27.0% Total Expenditure 5,03, % 31.3% Fiscal Deficit 3,24, % 62.8% Revenue Deficit 2,66, % 73.0% Primary Deficit 2,06, % 148% Source: CGA, PD Research The fiscal deficit at 61.2% of BE does not offer the true picture of government finances on account of mismatch between receipt collections and expenditure which is generally frontloaded. On revenue side, collections will gather momentum with time since the tax revenues are evenly distributed over the entire fiscal year. In addition, disinvestment of government s equity will fetch healthy amount in exchequer s kitty once the process of disinvestment kicks in. Government is looking to divest its stake in ONGC, Coal India, SAIL, NHPC, RINL, REC and PFC. The current market conditions is likely render support to government in meeting its disinvestment target of Rs 58,425 Cr. Thus, the next few months would be crucial for the government in terms of accelerating the paddle of disinvestment in this benign environment. Another thing to watch out will be the quality of expenditure since the last two years has seen compression of Plan expenditure to comply with the fiscal deficit target. Government s efforts directed at augmenting capacity rather than spending untowardly in favor of consumption is critical to improving state of Indian economy and government s finances in medium to long term framework. Overall, we believe the incoming numbers in near future need to be perused in conjunction with the economic conditions to gauge the sustainability of government s finances. This will unveil the government s credibility in achieving fiscal consolidation as delineated in the Budget. 4

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