ECONOMY | FLASH NOTE

ENAM Securities
India Research

India GDP
Sachchidanand Shukla
Sr VP & Economist
FY12E GDP TO BE LOWER ON SLUGGISH
Email: sachins@enam. com
Tel: 9122 6754 7648
CONSUMPTION; WATCH PRIVATE INVESTMENTS
With Q4FY12 GDP growth rate of 7.8% (lower than the expected 8.2%),
FY11 GDP has grown at 8.5% YoY. We forecast 7.9% GDP growth for
Contribution to GDP growth
FY12 as continuing tightening by RBI will dampen the growth outlook by
100% further slowing down the twin growth engines i.e. consumption and
capex. Even export growth will likely normalize going forward:
75%
5.8 4.2 4.9 5.3

50% Dual engines of growth already slowing down: Over the last six months,
1.8 1.3 1.6 1.7 relatively high interest rates have begun impacting consumption and it
25%
has weakened a tad at ~57% of GDP in FY11. Capital formation has
1.7 1.3 1.5 1.6
0% dropped to 29.5% in FY11 (vs. 30.8% in FY10) of GDP. Export growth too
2008 2009 2010 2011 will normalize going forward, if developed world demand moderates in
H2CY11. Leveraged spending by households is beginning to show signs
Agri Industry Services
of fatigue, as reflected in auto sales and consumer durables production.
Source: CSO, ENAM Research
No quick respite from Monetary Policy…: We don’t think this data will
deter the RBI from hiking rates as headline inflation remains way above
RBI comfort levels (8.7% in April). An impending Diesel and LPG price
hike will only add to the pressure. This implies that the RBI is further
likely to raise policy rates by 25 bps on June 16th, its next policy
meeting. With RBI possibly following it up with another 25 bps, bank
lending rates will rise further. Coupling this with a contractionary money
supply policy, domestic demand is likely to soften further.

…And contracting Fiscal Policy will also not help: The govt, in FY12, is
attempting the sharpest fiscal correction since 1991. Adjusted for the
one- time spectrum bonanza, FY11 deficit stands at~ 6.2 % (vs. the BE of
5.1 %), which is slated to go down to 4.6 % in FY12. Even if this is
overshot by ~60-80 bps due to oil & fertilizer subsidies, the Fisc will still
contract by ~80 bps in the current Fiscal.
Continued…
GDP growth
(YoY%) Jun-10 Sep-10 Dec-10 Mar-11 FY11 FY12e
Economic activity
Agriculture 2.4 5.4 9.9 7.5 6.6 3.8
Industry 10.2 8.4 7.1 6.1 7.9 7.7
Services 10.7 9.9 8.4 8.7 9.4 9.0
Expenditure
Private final consumption expenditure 8.9 8.9 8.6 8.0 8.6 7.9
Government final consumption expenditure 6.7 6.4 1.9 4.9 4.8 5.0
Gross capital formation 17.4 12.1 8.2 2.2 9.3 8.6
Overall GDP 9.3 8.9 8.3 7.8 8.5 7.9
Source: CSO, ENAM Research

ENAM Research is available on Bloomberg (ENAM <Go>), Reuters.com and Firstcall.com 31 May 2011
 India GDP

Risks to Our Estimates: Trends in global commodity prices and global risk appetite
hold the key to India’s growth. India will benefit from a fall in commodity prices
(and vice versa) that will reduce inflationary pressures and lead to an end of the
tightening rate cycle. A normal monsoon (both quantum & spread) will be critical
as usual.

Highlights of 2011 growth story:

Three key takeaways for FY11: (1) While private consumption growth stood at
8.6%, public consumption slipped to 4.8% after growing 16% in FY10. (2) Gross
Capital formation growth has inched up at 8.6%. Though there is no major
discernible on-the-ground pick up. (3) GDP by activity was led by agriculture which
grew 6.6% (vs. 0.4% in FY10) and trade, hotels, transport and communication
services up 10.3% (vs. 9.7% ) while manufacturing growth was down to 8.3% (vs.
8.8%) YoY.

…Private capex growth…Key to Watch: The pace of announcement of new

investments has fallen substantially. According to CMIE, new investment
announcements at Rs2.6 trillion in Q4FY11 (vs. Rs 2.9 trillion in Q3 and much
lower than Rs 3.5 trillion in Q2). There has also been a sudden rise in projects
abandoned in Q4FY11. Projects abandoned amounted to Rs 516 bn (vs. an
average ~ Rs250 bn a quarter).

The total new investments announced in 2010-11 were lower than in 2009-10.
This, and the persistence in the fall in quarterly new investment announcements,
indicates a further slowing down unless the global scenario improves or the govt
kick-starts its reform process.

Global macro remains challenging, but domestic reforms hold the key: Debt woes
of Europe are a key challenge and there are also question marks over the
sustenance of growth in the US, Japan and China. All these uncertainties may
further prolong the capex story. However, a turnaround in domestic reforms can be
a big positive trigger.

Auto sales: To continue to moderate IIP: Reflecting softening demand despite pick up

150 18.0
(YoY%)
(3mma YoY%)
14.0
100

10.0

50
6.0

0 2.0
Jan-10

Mar-10

Jun-10
Apr-10
May-10

Jul-10
Aug-10

Jan-11
Dec-10

Mar-11
Feb-10

Sep-10
Oct-10
Nov-10

Feb-11
Jan-10

Mar-10

May-10
Jun-10
Jul-10

Jan-11
Apr-10

Aug-10

Dec-10

Mar-11
Feb-10

Sep-10
Oct-10
Nov-10

Feb-11

Passenger Vehicles CVs IIP 3mma

Source: SIAM, ENAM Research

MAY 2011 ENAM Securities 2

 India GDP

Credit growth: Deceleration evident Mortgage growth: Yet to feel the int rate pinch

25 200,000
(3mma YoY%) (Rs mn)
160,000

20 120,000

80,000

15 40,000

Q1FY09
2QFY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
10
Jan-10

Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10

Nov-10
Dec-10
Jan-11

Mar-11
Feb-10

Sep-10
Oct-10

Feb-11
LIC HF HDFC Ltd

Source: RBI Source: Company reports

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