Macroeconomic Update: GDP Q3 FY18 Beating expectations, India s Real GDP noted a sharp rebound, coming in at 7.2% for Q3 FY18, higher than the revised estimate of 6.5% witnessed in the previous quarter. Gross Value Addition too, stood at 6.7%, gaining 50 bps quarter-on-quarter. This momentum was driven by a broad based recovery in the economy, pushing the overall headline GDP. The GDP deflator stood at a two-quarter high of 4.4% revealing the inflationary trends being observed in the CPI and WPI series. Q3 FY18 real GDP growth affirms the narrative of reinvigoration of the economic condition after the disruptions caused by structural changes. Furthermore, revival in manufacturing is what helps build into the overall narrative of the India growth story. Going forward, even though the government s adherence to the revised fiscal deficit target remains a cause for concern, rebound in the macroeconomic conditions brings respite. The economy is expected to maintain, if not gain, momentum on back of improvements in the supply chain resulting from GST implementation, consumption led demand from the 7 th CPC revisions, push for the rural economy as well as infrastructural advancements. The Gross Value Addition for Q3 FY18 at factor cost (2011-12) stands at Rs 20,83,336 Cr implying a growth of 6.7% compared to 6.9% observed in Q3 FY17. This growth is mainly led by a strong momentum in industry, services as well as agricultural sectors of the economy. Mining activity, as reflected by the IIP data, was the only sub-sector that witnessed a contraction, however, this too was partially impacted by an unfavorable base. Boost in crop production and in construction activity further aided the overall headline GDP. Public administration and defense activity also saw a pick-up in pace. Real GVA stands 50 bps higher than the previous quarter and nominal GDP stands substantially increased at 11.9% vis-à-vis 10.0% in Q2 FY18. Table 1: Trends in GDP growth Q3 FY16 Q3 FY17 Q1 FY18 Q2 FY18 Q3 FY18 GVA 7.3% 6.9% 5.6% 6.2% 6.9% Add: Net Taxes 4.9% 5.1% 7.2% 9.4% 13.2% Real GDP 7.1% 6.8% 5.7% 6.5% 7.2% Source: MOSPI, PD Research 1
While both the metrics stand on similar footing and GDP being a summation of GVA and net of product taxes and subsidies, it would be evident that the growth in tax figures have increased considerably in Q3 as a result of GST implementation. This high net tax inflow is likely to have boosted the overall headline real GDP to 7.2% in Q3. Sector-Wise Growth The table below goves a brief synopsis of growth rates observed in the sectoral GDP components: Table 2: Sector- wise Growth (in %) GVA at Constant Prices Q3 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Agriculture, forestry & fishing 7.5 2.7 2.7 4.1 Agriculture GVA 7.5 2.7 2.7 4.1 Mining & quarrying 12.1 1.8 7.1-0.1 Manufacturing 8.1-1.8 6.9 8.1 Electricity, gas & water supply 9.5 7.1 7.7 6.1 Industry GVA 8.8-0.4 7.0 6.8 Construction 2.8 1.5 2.8 6.8 Trade, hotels, transport, communication and services related to broadcasting 7.5 8.4 9.3 9.0 Financial, insurance, real estate and professional services 2.8 8.9 6.4 6.7 Public Administration, defense and other services 10.6 13.2 5.6 7.2 Services GVA 4.7 7.5 6.9 7.7 GVA at factor cost 6.9 5.6 6.2 6.7 Source: MOSPI, PD Research Agriculture joins the growth wagon: With expectations of record crop production according to the second advance estimates of the Ministry of Agriculture, agriculture sector at 4.1%, reflects the same. However, Q4 growth in this sector is expected to moderate to a meager 1.9% as production of food grains are expected to grow at 0.9% In FY18 compared to 9.4% in FY17. This would bring the overall sector growth to 3.0% in FY18 vis-à-vis 6.3% witnessed in the previous year. Industrial activity picks up: Momentum in the industrial sector sustained as production activity continued to present robust trends coming in at 6.8% for the quarter under review. Of its sub-sectors, manufacturing stood at a three-quarter high of 8.1%, indicative of concrete signs of economic revival. Growth momentum also persisted in 2
electricity production, growing at 6.1% compared to 7.7% in the previous quarter. However, Mining and Quarrying activity saw a contraction, as suggested by the IIP index, pulled further by an unfavorable base. Efficiency gains from the successful implementation of Goods and Services Tax is expected to propel this sector going forward. Services sector encourage: Services clocked in a five-quarter high of 7.7% as problems associated with demonetization and GST implementation stabilized. Construction activity reflected a noteworthy growth of 6.8%, highest in the 2011-2012 series as consumption of finished steel registered growth rate of 5.2%. Growth in this sector was further driven by Trade, hotels, Transport, Communication and Services at 9.0% and Financial, Real estate and Services at 6.7%. Public administration and defence, proxy to government spending grew by a 7.2% further pushing the services sector growth upwards. It is notable that this expenditure is expected to increase further by a staggering 15.0% in Q4 FY18, seeming contradictory to ongoing efforts at containing fiscal pressures. Expenditure GDP: Table 2: Rates of GDP (in %) Q3 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Government Final Consumption Expenditure 10.0 11.8 11.7 9.9 Private Final Consumption Expenditure 59.9 54.5 54.3 59.1 Gross Fixed Capital Formation 31.0 31.3 31.0 32.4 Change in stocks 0.7 0.7 0.7 0.7 Valuables 1.2 2.7 1.9 1.6 Exports 20.4 20.5 20.5 19.5 Less: Imports 22.3 23.3 21.7 22.6 Discrepancies -1.0 1.9 1.5-0.6 GDP 6.8 5.7 6.5 7.2 Source: MOSPI, PD Research Nominal GDP saw an uptick coming at 11.9% in relation to 10.0% growth in Q2 FY18 while real GDP also grew to 7.2% compared to 6.5% in Q2 FY18. This increase was pronounced across consumption and capital indicators, which indicated double digit growth rates. Gross fixed capital formation in Q3 grew by 12%, surprising on the upside but is expected to register growth rate of 9.7% at current prices and 7.6% at constant prices 3
during FY18. As per IIP, consumption noted modest recovery where capital goods saw a sharp rise of ~12% in Oct-Dec 18 quarter; this is reaffirmed by the recent GDP numbers. Compared to the previous quarter, the drag imparted by net exports was higher as exports contracted while imports expanded, largely due to the rise in oil prices. Notably, the GDP deflator stood at a two-quarter high of 4.4% reflecting the inflationary trends being observed in the CPI series. The source of this inflation is largely being observed due to high food price pressures. Going forward, rising input costs could be a factor driving the inflation trajectory upward. Outlook: The annual GDP estimated in the latest CSO data show that overall growth will moderate to 6.6% vis-à-vis 7.1% in FY18 due to a slowdown in growth during the first half of the year as the economy transitioned to a new tax regime alongside rising import costs. However, Q2 FY18 real GDP growth at 7.2% brings much respite while affirming market narrative of reinvigoration in economic activity. Furthermore, revival in manufacturing is what helps build in the overall narrative for the Indian growth story. In its last policy meet the MPC emphasized on the need to nurture growth momentum while ensuring a sustainable path for future impetus. Efficiency gain associated with the introduction of GST as well as a boost in consumption activity support an optimistic long term growth outlook. Benefits from various reforms such as resolution of the NPA mess would also contribute to this momentum. On the bond outlook, returning strength in the economy proves a mixed bag as prospects of rate hikes develop but increased tax revenue on account of an economic revival allay fears of fiscal slippage. 4
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