The GDP advance-estimates (at 7.1% for fiscal year 2016-17) put out by the Central Statistical Office (CSO) of the Government of India has virtually confirmed a slowdown in growth. This is as against 7.6% GDP growth for the financial year 2015-16. While these are just early estimates based on trends coming out in the first 7-8 months on a variety of fronts, it clearly points to the fact that GDP growth will be slower than what was originally anticipated. It also needs to be remembered that this is the first advance estimate for the full year and there will be more such intermediate estimates put out by the CSO as the year progresses and more data points will emerge. It is essential to understand what will drive lower GDP this year, its implications and also the performance of key components of overall GDP. Here are some of the key highlights of the Advance-Estimates of GDP for 2016-17…
Agriculture flatters on the upside…
This is probably the major positive take-away from the advance GDP estimates. For the full year 2016-17, agriculture is expected to grow at 4.1%, which is substantially higher than the 1.2% recorded in the financial year 2015-16. The big contribution to agriculture growth is likely to come from a bumper Kharif season. The Kharif output for 2016-17 was up by a whopping 8.9% compared to negative growth of -3.2% for the fiscal 2015-16. This sharp increase in Kharif output was largely driven by a normal monsoon in 2016 after 2 years of drought conditions across India. Another important component of livestock, animal husbandry and fisheries is likely to record a growth of 3.7% this year. The 4.1% growth in agriculture is important for two reasons. Firstly, it means that inflation will continue to remain subdued. Secondly, it means that the multiplier effect of agricultural growth is likely to seen in industry in the coming quarters. Of course, the final agricultural numbers will be known only after the outcome of the Rabi sowing season comes out but it is unlikely to fall sharply from these levels.
Pressure is visible on manufacturing sector…
One of the reasons why GDP in 2016-17 is likely to be under pressure is that both manufacturing and services are likely to be under pressure in this fiscal. In fact manufacturing is expected to slow down to 7.4% growth compared to 9.3% growth last year. This means that the revival in the capital cycle may be delayed a little further. Already the figures coming in for the IIP and the PMI-Manufacturing for the last couple of months are showing a distinct slowdown. Even the core sector numbers are showing pressure.
Pressure is visible in most services too…
The overall services space is likely to be a mixed bag for the full year 2016-17. For example utility services are likely to show flat growth at 6.5%, almost same as last year, but construction activity is likely to decline by 100 bps to 2.9% for the full year. This slowdown is already visible in the consumer segment with unsold inventories at all-time highs in most of the key markets. Trade, hotels and communication services are likely to grow much slower at 6% this year as compared to 9% last year. This is largely driven by lower demand for these services across the board. The financial services sector is also likely to show a 100 bps slowdown this year due to demand-pull factors.
Impact of demonetization yet to be factored…
What needs to be remembered is that the impact of demonetization is yet to be factored into the CSO calculations. Demonetization was launched on November 08th 2016 and the impact will be clearer once we get to see the data from November onwards. Most of the data considered for these advance estimates pertain up to the month of October only, especially data pertaining to industrial production and banking. Early indications are that demonetization has resulted in reduced footfalls and has impacted consumer facing segments like retail, financial services, consumer goods etc. How these segments perform post-January remains to be seen. But it surely opens up the risk that the eventual GDP growth for the full year may dip slightly below the 7% mark once the impact of demonetization is also factored into the calculations.
What are the larger implications of the GDP estimates?
There are 2 likely scenarios at this point of time. Firstly, the slowdown in output may persist for a few months as an outcome of demonetization. Secondly, it is also possible that due to a sharp shift to digitization and a vast expansion in resources of the banking system, there could be a spurt in credit and output growth. The impact of the GDP estimates on equity market valuations will largely depend on how the growth numbers behave in the next few months. The second scenario depicted above will be largely favourable for equity valuations. There is also the issue of the gap between India’s GDP growth and China’s GDP growth. India had built a potential gap of 100 bps and it needs to ensure that the gap does not close in too much. A GDP growth gap with China is essential to ensure that India continues to remain the magnet for global FDI and FPI flows.
In a nutshell, the advance GDP estimates have raised some concerns in the short term. However, a lot will depend on how this data pans out in the next few months as an outcome of the demonetization process. That will be critical for the final GDP number for the full year!
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