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Economics Research

Below estimate; H2 may fall even more

Indias Q2FY17 GDP growth was below estimates at 7.3% compared with
7.1% in Q1FY17. The deceleration is largely a result of subdued investment
spending, lower manufacturing and services activity while agriculture has
been a saviour due to normal monsoon. A part of the reason for lower
growth can be attributed to higher deflator. While Q2 growth was below
estimate, we have reduced our H2FY17 growth estimate to 6.4% (7.8% earlier)
a resultant of a sharp consumption slowdown due to the demonetization
exercise. We believe currency circulation will improve in Q4FY17, leading
to a bounce-back in GDP growth to 7.6% in FY18 from 6.9% in FY17.

Highlights
Q2 GDP growth was
below estimate at 7.3%
Investment demand
remains weak,
government spending
increased the most
We expect GDP to grow
at 6.9% in FY17

Q2FY17 GDP at 7.3%: GDP growth was below estimates on the back of
negative surprise in manufacturing at 7.1% (9.1% in Q1FY17), trade, hotels,
transport etc. at 7.1% (8.1% in Q1FY17) and financial services etc. at 8.2%
(9.4% in Q1FY17). The dip in these sectors can be explained by higher
deflator. For instance, the deflator for manufacturing increased to 2.3% in
Q2FY17 from 1.1% in Q1FY17, for trade, hotels etc. it increased to 3.5% from
1.2% in the previous quarter and for financial services etc. it increased to
3.7% from 1.2%. On a sectoral basis while agriculture growth improved to
3.3% in Q2FY17 from 1.8% in Q1FY17 on the back of normal monsoon,
industrial growth dipped to 5.2% in Q2FY17 (6% in Q1FY17) and services
growth dipped to 8.9% (9.6% in Q1FY17).
Investment demand remains subdued: While private consumption showed
some pick-up in Q2FY17 at 7.6% from 6.7% in Q1FY17, investment demand
weakened at (-) 5.6% in Q2FY17 compared with (-) 3.1% in Q1FY17.
Government consumption remained robust at 15.2% versus 18.8% in Q1FY17
on the back of government spending on account Pay Commission related
hikes and public capital formation. Exports seem to have decelerated at
0.3% in Q2FY17 from 3.2% in Q1FY17. Imports fell much more sharply thus
aiding overall GDP growth.
Demonetisation implications for growth: Prior to the demonetisation of
Rs500 and Rs1000 notes, we believed that consumption would be the key
driver of growth in FY17 on the back of a good monsoon and Pay
Commission awards. Investment was expected to remain a drag and
improve only with a lag. The construct has changed with as much as
Rs16trn worth of currency now being demonetised leading to severe
shortage of currency and thus expected to lead to a dip in consumption
demand. As of 27 November 2016, only 15.6% of the demonetised currency
has been replaced in the form of withdrawals and exchange and thus is
likely to impinge on consumption. Hence, we expect consumption demand
to fall in November and December and revive in Q4FY17 only after
circulation of currency is restored.

Sameer Narang

sameer.narang@idfcbank.com
+91-22-7132 5632

Indranil Pan

indranil.pan@idfcbank.com
+91-22-7132 5631

For Private Circulation only.

Revival of growth to pre-demonetisation levels will depend not only how


quickly the authorities is able to pump in currency, but also how much the
government is able to garner as taxes from the newly announced amnesty
scheme. As of now we believe the economy will slow d in H2FY17 and
normalise from around Q1FY18.
H2FY17 GDP growth to be 6.4% from 7.8% earlier: The shortage of
currency and the impending consumer spending slowdown will lead to a
dip in demand for industrial products and services. Hence, we expect
construction, manufacturing, electricity and mining output to be far lower
than pre-demonetisation estimates. We expect industrial growth in H2FY17
at 4.2% compared with 7% earlier. At the same time, trade, hotels,
transport etc. category will see sharp deceleration as consumption and
thus trade and transportation activity dips. Even real estate and
professional services activity will dip. However, deposit acceleration will
make up for some of the slowdown. Hence, services activity is now
expected at 8.2% in H2FY17 from our earlier estimate of 9.2%. Our overall
GDP growth estimate for FY17 now stands at 6.9% versus 7.6% earlier.
Important disclosures appear at the back of this report

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DATA RELEASE

GDP

GDP
Exhibit 1: Growth estimates revised lower
H2FY17

FY17

FY18

(% change)

Q1

Q2

Q3

Q4

Old

New

Old

New

Old

New

Agriculture, forestry and fishing

1.8

3.3

3.5

3.5

3.3

3.5

2.7

3.0

2.5

2.5

Industry
Mining and quarrying

6.0

5.2

3.7

4.6

7.0

4.2

6.5

4.9

7.0

6.5

-0.4

-1.5

2.0

2.0

3.5

2.0

2.4

0.5

3.5

3.3

9.1

7.1

5.0

6.0

8.8

5.5

8.8

6.8

8.5

7.9

9.4

3.5

4.5

5.5

7.3

5.0

7.8

5.7

6.5

6.8

Manufacturing
Electricity, gas, water supply and other utility
services
Construction

1.5

3.5

1.5

2.5

4.5

2.0

2.9

2.3

5.0

4.5

9.6

8.9

8.3

8.2

9.2

8.2

9.4

8.8

9.5

9.5

8.1

7.1

6.5

8.0

9.8

7.3

9.5

7.4

10.0

9.4

Financial, real estate & professional services

9.4

8.2

10.5

9.5

10.5

10.0

10.1

9.4

11.0

10.8

Public administration and defence

Services
Trade, hotels, transport, communication &
services related to broadcasting

12.3

12.5

7.5

6.5

6.3

7.0

8.1

9.7

6.3

7.5

GVA at basic prices

7.3

7.1

6.0

6.3

7.4

6.1

7.5

6.7

7.7

7.5

GDP

7.1

7.3

6.2

6.6

7.8

6.4

7.6

6.9

7.8

7.6

Source: CSO, IDFC Economics Research

Exhibit 2: Agriculture growth did well in Q2FY17


(% change)

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

2.0

-1.0

2.3

1.8

3.3

Industry

6.3

8.6

7.9

6.0

5.2

Mining and quarrying

5.0

7.1

8.6

-0.4

-1.5

Manufacturing

9.2

11.5

9.3

9.1

7.1

Electricity, gas, water supply and other utility services

7.5

5.6

9.3

9.4

3.5

Construction

0.8

4.6

4.5

1.5

3.5

Services

9.0

9.1

8.7

9.6

8.9

Agriculture, forestry and fishing

Trade, hotels, transport, communication & services


related to broadcasting

6.7

9.2

9.9

8.1

7.1

Financial, real estate & professional services

11.9

10.5

9.1

9.4

8.2

Public administration and defence

6.9

7.2

6.4

12.3

12.5

GVA at basic prices

7.3

6.9

7.4

7.3

7.1

Q1FY17

Q2FY17

Source: CSO, IDFC Economics Research

Exhibit 3: Investment spending remains subdued


(% change)

Q2FY16

Q3FY16

Q4FY16

Private final consumption expenditure (PFCE)

6.3

8.2

8.3

6.7

7.6

Govt final consumption expenditure (GFCE)

3.3

3.0

2.9

18.8

15.2

Gross Fixed Capital Formation (GFCF)

9.7

1.2

-1.9

-3.1

-5.6

Change in Stocks (CIS)

5.4

7.7

5.6

7.1

4.7
-47.0

Valuables

12.4

13.5

-17.2

-48.7

Exports

-4.3

-8.9

-1.9

3.2

0.3

Less Imports

-0.6

-6.4

-1.6

-5.8

-9.0

-80.6

266.2

378.4

3,347.0

-576.6

7.6

7.2

7.9

7.1

7.3

Discrepancies
GDP

Source: CSO, IDFC Economics Research

2 | IDFC ECONOMICS RESEARCH

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GDP
Exhibit 4: GVA growth to normalize only in FY18
(% change)

Weight (%)

FY13

FY14

FY15

FY16

FY17

Agriculture, forestry and fishing

15.4

1.5

4.2

-0.2

1.2

3.0

2.5

Industry

31.3

3.6

5.0

5.9

7.4

4.9

6.5

3.1

-0.5

3.0

10.8

7.4

0.5

3.3

17.5

6.0

5.6

5.5

9.3

6.8

7.9

Mining and quarrying


Manufacturing

FY18

Electricity, gas, water supply and other utility services

2.2

2.8

4.7

8.0

6.6

5.7

6.8

Construction

8.5

0.6

4.6

4.4

3.9

2.3

4.5

Services

53.4

8.1

7.8

10.3

8.9

8.8

9.5

Trade, hotels, transport, communication & services


related to broadcasting

19.2

9.7

7.8

9.8

9.0

7.4

9.4

Financial, real estate & professional services

21.6

9.5

10.1

10.6

10.3

9.4

10.8

Public administration and defence

12.6

4.1

4.5

10.7

6.6

9.7

7.5

100.0

5.4

6.3

7.1

7.2

6.7

7.5

5.6

6.6

7.2

7.6

6.9

7.6

GVA at basic prices


GDP

Source: CSO, IDFC Economics Research

3 | IDFC ECONOMICS RESEARCH

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GDP

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