Indian economy likely to rebound strongly as negative factors waning

Impact: Positive (Corporate profitability), Negative (Fiscal Deficit)

Brief: Indian GDP number for Q2, FY19 has clocked 7.1%; the number was 8.2% during the previous quarter. This quarter, Indian economy was surrounded by adversities emanating from the United State and Japan. However, as most negative factors are waning since November end, the GDP growth is likely to rebound strongly Q4 onwards.

India's GDP number for Q2, FY19 has clocked at 7.1%, 90 bps lower compared to the previous quarter. During the quarter in question, Indian economy was surrounded by various adversities, which emanated from a recovering United State and the safe haven buying of Japanese debt. Talking about the US, the country had announced higher tariff rate on some commodities imported from Chinese and imposing economic sanction on Iran. These two decisions had escalated global geo-political tensions and ended up diluting global economic momentum as well.

As a result of economic sanction on Iran, commodity prices had shot up sharply – Brent for example had breached the almost four-year high level of $78 in September, 2018. Following the crude price movement, USD-INR on the other hand, slipped to its lowest level of 72.2 during the same timeframe. These factors collectively pushed India's trade deficit close to (-) $50 billion dollar in Q2, FY19 as against (-) $32 billion, a year earlier. As per our assessment, higher imports have cost the Indian growth story almost 5 bps.

Likewise, escalation in input costs has lowered profit before tax (PBT) for the manufacturing sector. Understandably, PBT along with employee expenses is part of GVA calculation – thereby having a negative impact on the number. However, due to strong demand (both external and domestic), the firms were able to offload the cost burden to their customers.

Considering the external factors again - facing the trade war dilemma, emerging markets including India were facing higher capital outflows impacting domestic liquidity. As the RBI tried to stabilize the Rupee via OMO, external reserves depleted by over $8 billion, seriously impacting the currency in circulation. Combined with other factors, this resulted in the Repo WACR differential reducing to 7 bps in September, 2018 as against the average of 16 bps during the base quarter. This liquidity deficit along with stressed assets, limited the growth rate of finance and real estate segment to just 6.8%, during the time frame.

The economy, however, remains the fastest growing major economy in the world despite these headwinds. The positive factors that are propelling the Indian GDP growth are private consumption and government expenditure. Private consumption, which is encouraged by pay commission recommendations and hike in MSP, has been growing at 7%. Similarly, the Government's revenue expenditure excluding interest payment and subsidies has been growing at an encouraging rate of 10.93%, adding 21 bps to the overall growth.

Going ahead, as the negative factors are waning since end of November, the GDP growth is likely to rebound Q4 onwards. In addition, the PMI index indicates domestic firms are witnessing strong demand from both the internal as well as external market, as mentioned earlier. Hence, firms are likely to register higher revenue growth as well as profitability. On a positive note, global liquidity condition has been showing a signs of improvement. We see this development as increasing capital inflows and thereby helping stabilize the exchange rate in the medium term. Having said that however, we believe that the developments pertaining to the US Fed decisions, US-China trade negotiation outcome, China's debt bubble and Iran sanctions (in light of revelations in Saudi Arabia) remain a downside risk to this outlook.

Q2 GVA (Real) growth based on production:

  Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
GVA 5.55 6.13 6.62 7.56 7.97 6.88
Agri 3 2.65 3.12 4.49 5.3 3.83
Manu -1.78 7.09 8.5 9.07 13.46 7.45
Industry 0.13 6.13 7.09 8.79 10.29 6.84
Services 9.48 6.84 7.7 7.72 7.35 7.5
Trade 8.36 8.5 8.51 6.76 6.74 6.8
Finance & Real Estate 8.43 6.07 6.92 4.95 6.52 6.31
Public Admin 13.52 6.08 7.66 13.29 9.95 10.93

Q2 GDP growth based on consumption:

Jun-17 5.6 6.94 17.62 0.82
Sep-17 6.3 6.82 3.81 6.05
Dec-17 7.0 5.86 6.83 9.06
Mar-18 7.7 6.69 16.85 14.42
Jun-18 8.2 8.6 7.56 10.03
Sep-18 7.1 7.01 12.68 12.47

Source: MOSPI, Acuité Research

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