Data release: India data update. January 8, Sumedha Dasgupta

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1 Data release: India data update Treasury Research Group October 30, 2006 For private circulation For only private circulation only India: Growth seen subdued; slow improvement to manifest Advance estimates for GDP growth for FY2018 was released last week. The Central Statistics Office expects GDP growth to moderate to 6.5% YoY in FY2018 from 7.1% YoY in FY2017, while GVA growth is expected to clock 6.1% YoY as compared to 6.6% YoY in the last fiscal. Since GDP growth in H1 FY2018 has been ~6% YoY, growth is expected to pick up to ~7% YoY in the second half of the ongoing fiscal. January 8, 2018 Sumedha Dasgupta icicibank.com Please see important disclaimer at the end of this report Key highlights of advance estimates for FY2018 GDP: Growth of agriculture is expected to moderate to 2.1% YoY in FY2018 from 4.9% YoY in FY2017, impacted adversely by a decline in the output for kharif crops. Additionally, agriculture growth is subject to an adverse base effect, as growth was robust last year following two consecutive years of drought. Rabi sowing has been ~0.2% lower in yearly terms till January 5, 2018, with major shortfalls in annual terms seen in acreage of wheat (5%), oilseeds (5%) and, to a lesser extent, for coarse cereals (0.4%). Reservoir storage was at 52% of total capacity on January 4, 2018, which is lower than 55% seen at the same time last year, boding ill for rabi sowing. While manufacturing growth has risen sharply in Q2 FY2018, the margins of corporates may be increasingly squeezed as input prices for nearly all commodities are on an uptrend. This will keep pressure on manufacturing growth going ahead. The trade, hotels, transport & communication segment of services will see a higher growth at 8.7% YoY as compared to 7.8% YoY in FY2017. GVA for this component is estimated using an index of turnover based on sales tax. Since sales tax is now subsumed under GST, therefore, a comparable estimate of turnover based on sales tax has been estimated. Given this anomaly, it is difficult to accurately predict the performance of this sector in this fiscal, and a clearer picture will emerge only in the next fiscal, when a like-to-like comparison is available. (Methodology for sales tax approximations mentioned in the Appendix). The public administration and defence component is expected to see a slowdown this year, which would be rational, given the government s strained fiscal metrics this year. However, what is important is that the government does not seem to be curtailing expenditure sharply this year, as is evidenced by the Q4 FY2018 borrowing numbers, and hence, will keep services supported. Gross fixed capital formation is likely to rise in FY2018, indicating an incipient trend in investment recovery, although a meaningful recovery is still probably a while away in the face of widespread corporate deleveraging. In this context, amendments to the IBC, as well as swift resolution under NCLT will aid sentiment. Although private consumption expenditure is likely to clock lower growth this fiscal, trends in high-frequency consumption indicators is more favourable (personal loan growth, automobile sales, domestic passenger traffic, etc). Given that the government s focus going ahead would be on de-stressing the rural economy in the run up to the General Elections in 2019, rural pump priming is likely to be a key focal area. Rural wage growth has slowed to 5.5% YoY in October from above 6% YoY in the prior three months. The Government will have significant focus on lifting rural incomes, and this is likely to be a key theme in the Budget for FY2019 as well. Implementation of the Pay Commissions at state level, as well as measures like farm loan waivers will additionally support rural consumption. The government may also resort to sizeable MSP hikes in FY2019 to support rural incomes. In tandem with the fact that the rural sector has much higher marginal propensity to consume than its urban counterpart, a meaningful recovery in consumption is likely to come about through these measures. On balance, we had mentioned that there could be slight downside risks to our full year estimate for GVA growth of 6.5% YoY, and we now expect FY2018 GVA could be ~ % YoY. This is higher than the government estimate of 6.1% YoY, which could be an underestimate, and may imply that the base effect has not been adequately factored into projections. We retain our indicative FY2019 GVA estimate at ~ % YoY.

2 Advance estimates point to tepidity in growth GVA at basic prices (% YoY) FY2017 FY2018 Agriculture Industry of which: Mining & quarrying Manufacturing Electricity, gas,water supply & other utility services Construction Services of which: Trade, hotels, transport & communication Financial, real estate & professional services Public administration, defence and Other Services GVA (basic price) 6.6 Source: CSO 6.1 A glimpse of recent high-frequency indicators for the Indian economy shows that on most fronts, the economy has started Q3 FY2018 on a fairly robust note. Among the lead indicators for consumption activity, a favourable trend is visible in personal loan growth and domestic passenger traffic. Meanwhile, on the industrial front, manufacturing PMI, credit allocation to industry, and core infrastructure industries growth have shown marked improvement in recent prints. On the external front, India s forex reserves buildup now provides a robust import cover for over 12 months. The rise of core infrastructure output to a 13-month high 6.7% YoY in November from 2.9% YoY in July is largely on the back of sharp improvements in output of steel, cement, coal and refinery products. Manufacturing PMI rose to a healthy 54.7 in December on the back of robust growth in new orders and reduction in GST rates. Moreover, stronger factory production levels translated into the fastest rate of employment creation since mid Growth in non-food credit has risen to 11.3% YoY in December from a low of 4.1% YoY in May. Industrial credit growth has re-entered positive territory after 13 months, clocking 1.0% YoY growth in November. Snapshot of the Indian Economy Domestic passenger (% YoY) traffic Freight traffic Cargo traffic IIP Mining Manufacturing Core Electricity Industries Exports Apr May Jun Jul Aug Sep Oct Nov Source: CEIC, ICICI Bank Research Overall, we expect GDP growth to remain on an uptrend in H2 FY2018 supported by fading of GST-related disruptions, renewed buildup of supply chains, improved consumption demand and better export performance. 2

3 (1) Taxes on products at current prices APPENDIX Methodology of estimation Taxes on products for compiling GDP include both GST and non-gst revenue. GST revenue based on GSTR filings as provided by Central Board of Excise and Customs, Department of Revenue, Ministry Finance has been used. This include CGST, SGST, UTGST, IGST (domestic and imports), Cess (Domestic and Imports). The non- GST revenue include Central and State excise duties, custom duties and sales tax on goods outside the tax base of GST like Crude oil, Petrol, Diesel, ATF& Natural gas and Alcohol for human consumption etc. (2) Taxes on products at constant prices Present methodology of compiling constant price estimates of taxes on products by volume extrapolation has been adopted in line with the methodology prescribed under of System of National accounts, Volume extrapolation is done using volume growth of taxed goods and services and aggregated to get the total volume of taxes. (3) Estimating GVA from trade sector GVA from Trade sector is estimated using an index of turnover based on Sales tax. With introduction of GST, sales tax data is now subsumed under GST. In the GSTR-3B returns that are now being filed, total outward taxable supplies is available without HSN/SAC codes. This taxable value of outward supplies is inclusive of both services and goods. Sales Tax/VAT is imposed on sale or purchase of goods. Till such time the taxable value of goods supplied become available from tax records, a comparable estimate of turn over based on sales tax will have to be estimated. Following three approaches to project likely sales tax collection were examined. (a) Ratio of Sales tax collected on specific products like POL which are outside the tax base of GST and the total sales tax collected from onwards were examined. It was observed that the ratios were by and large stable. Using this relationship, likely sales tax collection for second quarter of was projected. (b) Forecasting quarterly sales tax data for Q based on regression of Sales tax on value of output of commodity producing sectors available from onwards. To account for seasonal fluctuations, seasonal dummy variables were used. (c) Estimating sales tax collection by using nominal growth in output of commodity producing sectors that are taxed. The above three approaches were placed before the Advisory Committee on National Accounts Statistics (ACNAS). The ACNAS recommended using an average of estimates obtained by adopting three approaches. 3

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