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com 01

GDP REBOUNDS IN Q1, NON-FARM GDP BOTTOMS OUT
ECONOMY

Q1FY15 GDP growth surprised marginally with a print of 5.7% (our est
5.5%) – highest since Dec 2011. Agriculture (up 3.8% YoY),
manufacturing (up 3.5% YoY vs -1.2% in Q1FY14) and electricity
segment (up 10% YoY) led the rebound. Services grew at 6.8% YoY
though the largest services sub-segment ie Trade, hotels & transport
growth remained poor. However, the story clearly is that non agri GDP
is bottoming out.

Viewed from the expenditure side, net exports continued to support
growth with a contribution of 3% to overall growth highlighting the
importance of global backdrop. Investment (GCF) growth reflected
improved sentiments contributing 1.2% to growth aided by GFCF and
shrinkage of valuables. However, Private consumption (62% of GDP
from expenditure side) growth of 5.6% YoY (8.2% in Q4FY14) despite
softer YoY inflation needs to be watched out for going forward.


29 AUG 2014 Eco Update

Non-farm GDP set to rebound
0
2
4
6
8
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
S
e
p
-
1
3
D
e
c
-
1
3
M
a
r
-
1
4
J
u
n
-
1
4
(YoY %)
GDP by eco activity GDP by expenditure

Source: CSO

Growth revival evident but real rebound from FY16 onwards
Forecasts (incl ours) for FY16 and FY17 are now more propitious given estimates of lower global commodity (esp crude)
prices, stable INR and a turnaround in sentiments. A higher Q1 print constitutes a slightly upward bias for our full year
forecast. However our FY15 estimate stands revised only marginally at ~5.6% (5.4% earlier) given the hanging sword
of a cut in expenditure towards the fag end of the fiscal year to meet the aggressive 4.1% fiscal deficit target, tight
money stance of RBI and a very gradual capex recovery.
In the near term, we see the rebound in manufacturing spilling over and sustaining even beyond the first quarter. There
is also a whiff of a turnaround in the important services sector as evident in the composite PMI uptick and other high
frequency indicators. However, the clearest signal of a turnaround will come from a definitive rise in credit demand,
which for now remains tepid. Moreover, impaired balance sheets of the banking and corporate sector, absence of
definitive demand triggers, uncertainty over regulatory environment and low capacity utilization (75% currently) would
impede a sharp revival of the capex cycle in FY15.
However, improved sentiments, ability of the new govt to up the ante on reforms, kick start capex and improve project
execution will certainly manifest in higher growth rate from FY16 onwards esp with a favourable external backdrop.
The key risks to our call obviously are deceleration of reforms, any cut in government expenditure to meet
fiscal targets for FY15 and waning of export growth:
♦ Risks from expenditure cut to meet fiscal targets: The FY15 budget upped capital expenditure by Rs 1 trn. Fiscal
deficit during the first four months of the current fiscal has breached 62% of full year's target. Tax collections are a
paltry 14% of the full year’s target raising the spectre of impending expenditure cuts in the last quarter to meet the
stiff target of 4.1% if government’s non tax revenue moves (esp divestments) do not add up. This would be a
negative for growth.
♦ Deficient monsoon & a circumspect RBI: With an 18% rainfall deficit and ~37% of met subdivisions with poor
rainfall, agri growth will wane over the rest of the year. While the impact on overall output may be marginal, food
inflation risks will come to the fore. Thus, with RBI staying tight on interest rates, for a period considerably longer
than expected along with expenditure control and fiscal consolidation moves by the government can impede overall
GDP growth for this year.
Note: The report has not been edited in the interest of timeliness
Sachchidanand Shukla Sr VP & Economist
sachchidanand.shukla@axiscap.in 91 22 4325 1108




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29 AUG 2014 Eco Update
ECONOMY


GDP by expenditure:
♦ Net Exports were the main drivers contributing ~3% to overall growth. Export
pick up contributed ~2.8% thanks to sustained external demand and a
favourable INR. Contribution from shrinking imports was negligible. It goes
without saying that global growth trend will remain crucial for India’s growth till
capex recovery takes shape.
♦ Private consumption growth rose to 5.6% YoY but lower as compared to ~8%
in Q4 despite the help from general election related spending. True, some of
the other indicators such as auto sales, diesel demand etc point to an
impending recovery in consumption. However, the festive season consumption
data will make the picture clearer on the trend. If these numbers sustain, they
will help trigger a revival in investment demand.
♦ GFCE: Stood at a 4 quarter high of 8.8% YoY and contributed a sizeable 1.1%
to the quarterly growth number helped by strong non revenue expenditure
growth. However, we expect this number to wane towards H2 as government
expenditure is likely to be curtailed.
♦ Gross capital formation also rebounded and contributed 1.2% to growth, aided
by GFCF (contribution rose to 2.3%) and shrinkage of valuables. However, it
remains to be seen if this trend continues given weak corporate and bank
balancesheets.

GDP by activity:
♦ Agriculture growth spurted to 3.8% vs 4% in Q1FY14 helped by the spillover
and accounting of record rabi output in Q1 (the end of agri year). However,
this is likely to wane in the subsequent quarters given the drought like conditions
and uneven distribution of rainfall, we expect overall agri growth for the year to
come in at ~1.7%.
♦ Industry grew by at 4.2% vs -0.4 YoY in Q1FY14, as manufacturing grew 3.5%
- a 9 quarter high and mining which has remained a drag for 2 years growing
by 2.1%. Electricity segment growth has been the highest since Sep 11 aided
by a delayed monsoon and we expect these numbers to subside. Construction
segment (aided by higher cement output) grew by 4.8% (10 quarter high).
♦ Services sector grew by 6.8% helped by Financing, insurance, real estate
segment growth of 10.4% YoY despite a decline in credit and deposit growth.
Community social and personal services growth was strong at 9.1% YoY.
However, this is likely to soften going forward as Public administration and
defence (~45% of the segment) will weaken in line with government
expenditure in H2.
Importantly, Trade, hotels, transport and communication, the largest sub
segment of GDP, growth remained tepid at 2.8% despite a favourable base
indicating the persisting broader slowdown in services segment.






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29 AUG 2014 Eco Update
ECONOMY


Earnings growth rebounds Exhibit 1:
(20)
0
20
40
60
80
M
a
r
-
0
8
M
a
r
-
0
9
M
a
r
-
1
0
M
a
r
-
1
1
M
a
r
-
1
2
M
a
r
-
1
3
M
a
r
-
1
4
(YoY%)

Source: Axis Capital
OECD India Lead Indicator Exhibit 2:
96
98
100
102
104
M
a
r
-
0
8
M
a
r
-
0
9
M
a
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1
0
M
a
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1
M
a
r
-
1
2
M
a
r
-
1
3
M
a
r
-
1
4
(Index)

Source: OECD

Growth rate comparison Exhibit 3:
(YoY %) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
Economic activity

Agriculture 1.8 1.8 0.8 1.6 4.0 5.0 3.7 6.3 3.8
Industry 0.3 (0.4) 1.7 2.1 (0.4) 2.6 (0.4) (0.2) 4.2
Services 7.2 7.6 6.9 6.3 7.2 6.3 7.2 6.4 6.8
Expenditure

PFCE 5.0 4.7 5.1 5.1 5.6 2.8 2.8 8.2 5.6
GFCE 10.2 9.9 4.5 1.8 12.9 (0.1) 3.6 (0.4) 8.8
GFCF (2.7) 2.1 6.2 3.8 (5.1) 0.3 (3.2) (2.2) 3.4
Overall GDP 4.5 4.6 4.4 4.4 4.7 5.2 4.6 4.6 5.7

Source: CSO




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29 AUG 2014 Eco Update
ECONOMY

Supply side indicators

IIP & core IIP Exhibit 4:
0
3
6
9
12
(6)
0
6
12
18
M
a
r
-
0
8
M
a
r
-
0
9
M
a
r
-
1
0
M
a
r
-
1
1
M
a
r
-
1
2
M
a
r
-
1
3
M
a
r
-
1
4
(3mma YoY
%)
(3mma
YoY%)
IIP Core IIP (RHS)

Source: CSO; EA-Industry; Axis Capital
Cement perks up Steel output lagging Exhibit 5:
(10)
(5)
0
5
10
15
20
M
a
r
-
0
8
M
a
r
-
0
9
M
a
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1
0
M
a
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1
1
M
a
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1
2
M
a
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1
3
M
a
r
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1
4
(3mma
YoY%)
Cement Production Steel

Source: EA-Industry; Axis Capital

Govt expenditure sustainability will be a Exhibit 6:
question mark
(60)
(30)
0
30
60
90
M
a
r
-
0
8
M
a
r
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0
9
M
a
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1
0
M
a
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1
1
M
a
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1
2
M
a
r
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1
3
M
a
r
-
1
4
(3mma
YoY%)
Govt expenditure Avg.

Source: CMIE; Axis Capital
Robust electricity output bodes well Exhibit 7:

0
5
10
15
M
a
r
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0
8
M
a
r
-
0
9
M
a
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1
0
M
a
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1
1
M
a
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1
2
M
a
r
-
1
3
M
a
r
-
1
4
(3mma
YoY%)
Electricity generation Avg.

Source: CMIE; Axis Capital

Goods traffic below trend Exhibit 8:
(4)
0
4
8
12
16
M
a
r
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0
8
M
a
r
-
0
9
M
a
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1
0
M
a
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1
1
M
a
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1
2
M
a
r
-
1
3
M
a
r
-
1
4
(3mma
YoY%)
Goods traffic on railways Avg.

Source: CMIE; Axis Capital
Diesel consumption ticking up Exhibit 9:
(5)
0
5
10
15
20
M
a
r
-
0
8
M
a
r
-
0
9
M
a
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1
0
M
a
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1
1
M
a
r
-
1
2
M
a
r
-
1
3
M
a
r
-
1
4
(3mma
YoY%)
Diesel Consumption Avg

Source: Petroleum Planning & Analysis Cell; Axis Capital



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29 AUG 2014 Eco Update
ECONOMY

Demand side

Consumption indicators

Auto sales on an uptrend Exhibit 10:

(30)
0
30
60
M
a
r
-
0
8
M
a
r
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0
9
M
a
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1
0
M
a
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1
1
M
a
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1
2
M
a
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1
3
M
a
r
-
1
4
(3mma
YoY%)
Passenger Vehicles 2-Wheelers

Source: SIAM; Axis Capital
Govt expenditure a key driver of consumption Exhibit 11:
growth
(60)
(30)
0
30
60
90
M
a
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M
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1
M
a
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-
1
2
M
a
r
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1
3
M
a
r
-
1
4
(3mma YoY%)
Revenue Expenditure Avg.

Source: CMIE; Axis Capital

Credit growth & durables loan growth Exhibit 12:
(60)
(40)
(20)
0
20
40
60
0
5
10
15
20
25
30
M
a
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J
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J
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M
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M
a
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1
4
J
u
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1
4
(YoY%)
(YoY%)
Total Credit Consumer durable loan

Source: RBI; Axis Capital
Rural demand correlated with agri output Exhibit 13:
(10)
(5)
0
5
10
15
M
a
r
-
0
8
M
a
r
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0
9
M
a
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1
0
M
a
r
-
1
1
M
a
r
-
1
2
M
a
r
-
1
3
(YoY%)
Production of Foodgrains Avg

Source: CMIE; Axis Capital










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29 AUG 2014 Eco Update
ECONOMY


GFCF (Capex) indicators: Extremely feeble

New announcements at record lows Exhibit 14:
0
2,000
4,000
6,000
8,000
10,000
M
a
r
-
0
8
M
a
r
-
0
9
M
a
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1
0
M
a
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1
1
M
a
r
-
1
2
M
a
r
-
1
3
M
a
r
-
1
4
(Rs bn)
New projects Avg

Source: CMIE; Axis Capital
Infra & Engg co sales & backlogs reviving Exhibit 15:
(50)
(25)
0
25
50
75
M
a
r
-
0
8
D
e
c
-
0
8
S
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9
J
u
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M
a
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1
1
D
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1
1
S
e
p
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1
2
J
u
n
-
1
3
M
a
r
-
1
4
(YoY%)
Sales Order Inflow Backlog

Source: Company; Axis Capital

CVs an important indicator is far below avg Exhibit 16:
(60)
(30)
0
30
60
90
120
150
M
a
r
-
0
8
M
a
r
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0
9
M
a
r
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1
0
M
a
r
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1
1
M
a
r
-
1
2
M
a
r
-
1
3
M
a
r
-
1
4
(3mma YoY%)
CVs Avg.

Source: SIAM; Axis Capital
Export pick up aided by INR Exhibit 17:
(60)
(30)
0
30
60
90
M
a
r
-
0
8
M
a
r
-
0
9
M
a
r
-
1
0
M
a
r
-
1
1
M
a
r
-
1
2
M
a
r
-
1
3
M
a
r
-
1
4
(3mma YoY%)
Exports Avg.

Source: Bloomberg; Axis Capital




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29 AUG 2014 Eco Update
ECONOMY















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Tel:- Board +91-22 4325 2525; Dealing +91-22 2438 8861-69;
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