Start of a gradual cyclical economic recovery. Real GDP growth accelerated to 6.3% in 2QFY18 and GVA growth to 6.1% from sub-6% in the previous quarter as the transitory disruptions led by GST gradually begin to fade. The pickup was largely witnessed in manufacturing and mining sectors even as agriculture and service sectors lagged. As economic growth begins to recover gradually and inflation picks up pace, we expect RBI to maintain status quo in FY2018. We revise down our FY2018 GVA growth estimate by 30 bps to 6.5% and pencil in FY2019 GVA growth at 7.1%.
GDP growth finally reverses its falling trend
Real GDP growth accelerated to 6.3% in 2QFY18 compared to 5.7% in 1QFY18. Nominal GDP growth improved marginally to 9.4%. Real GVA growth edged up to 6.1% (Kotak: 6.3%) from 5.6% in 1QFY18. As noted in the press conference, implementation of GST has led to a significant statistical challenge in calculating GDP. We note that GDP is calculated by adding net indirect tax collections to GVA. Given the uncertainty on tax liabilities by businesses, the government has provided significant flexibility in filing timelines. Additionally, while calculating GVA in the trade sector, the CSO uses sales tax data as a proxy. Lack of comparable data post GST could have led to understating of the sector’s growth.
Industrial sector leads the growth
GVA growth of 6.1% in 2QFY18 was largely led by significant restocking post GST, as is reflected in the pickup in industrial growth (5.8% compared to 1.6% in 1QFY18). Within industry, manufacturing (7% from 1.2% in 1QFY18) and mining (5.5% from (-) 0.7% in 1QFY18) led the growth as was already reflected in the high frequency data. Meanwhile, agricultural and service sectors were the laggards. Weak crop production against a bumper production last year has weighed on agricultural growth. Within services, uncertainty in GST collections, limited government spending, and likely distortions due to implementation of RERA have led to a broad based weakness (Exhibit 1).
Investment growth shows nascent signs of strength while consumption slips
On the demand side, private consumption growth continued to slowdown for the third quarter at 6.5%, in sync with probable fall in crop production. Government consumption growth, expectedly, slowed down sharply to 4.1% given the frontloading of expenditure in 1QFY18 and adjustment of expenditure to lower indirect tax revenues. Expectedly, net exports were less of a drag given unchanged export growth and moderation in import growth. On the brighter side, gross fixed capital formation (GFCF) grew for the second consecutive quarter by 4.7% from 1.6% in 1QFY18 though a sustainable optimism is yet early to build in (Exhibit 2).
Gradual recovery underway but yet to be durable
Even as the economy has arrested the five quarter consecutive slowdown in growth, we have revised down our FY2018 GVA growth to 6.5% from our earlier estimate of 6.8% factoring in a slower pace of adjustment by the private sector to the GST regime along with slow-paced government spending. However, we expect the economy to recover gradually to 7.1% in FY2019 as (1) GST related disruptions smoothen out, and (2) consumption improves amid rising rural wages and lower GST tax incidence, and expected payouts from State’s implementation of 7CPC (Exhibit 3). Meanwhile, lack of private sector investment growth amid still low capacity utilization and gradual adjustment of corporate and bank balance sheets are expected to continue to constrain growth in FY2019.
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