India: Slowing growth momentum; RBI pause likely
- Weakness was driven by slower consumption and a wider trade deficit
- Base effects continue to be adverse at least until mid-2019
- We see FY19 growth at 7.1%, modestly better than FY18’s 6.7%
- The RBI is likely to pause this week and rest of FY19
India’s 3Q18 (second quarter of FY19) growth slowed to 7.1% YoY, modestly below consensus at 7.4% and us at 7.3%. This marks a step down from 8.2% in 2Q. On the supply-end, Gross Value Added (GVA) growth stood at 6.9% from 8% in 2Q.
Source: CEIC, DBS Group Research
Under expenditure, the slowdown was concentrated in two segments – private consumption and net trade. On the first, lead indicators had pointed to a likely moderation in rural demand, particularly as agricultural prices and incomes (wage growth) have eased. Sharp rise in fuel prices and signs from lower volume growth in auto and consumer durables companies, carried signs of lower urban spending. Net trade, along expected lines, was the other underperformer, pulled down by a higher oil import bill and less robust exports. By contrast, fixed investment growth accelerated to 12.5% from 2Q’s 10%, benefiting from higher public infrastructure spending.
On the sectoral end, the strain on the agricultural sector was also visible under the sectoral breakdown, as output eased to 3.8% vs 5.3% in 2Q. The agriculture ministry projections show that food-grain production during the summer crop slowed this year vs FY18. Recent inflation numbers also highlight the limited boost from Minimum Support Prices (MSP) to food prices, suggesting procurement still needs to be stepped up.Industrial activity was weighed down by slower manufacturing, construction and mining output. Notably, corporate earnings had registered higher sales in 3Q, but top-line strength was offset by a subdued bottom-line due to rising raw materials costs, owing to higher oil and a depreciating rupee. The crucial services sector (~60% of GDP) was marginally better on YoY terms on higher public admin and services.The gauge of underlying non-farm activity, core GVA however corrected down to a four-quarter low of 6.6% YoY from 8.1% in 1Q, highlighting the heavy-lifting borne by public expenditure and lukewarm contribution of the private sector.
Source: CEIC, Data transformation by DBS Group Research
With the slowdown in 3Q factored in, driven partly by base effects, markets are unlikely to react adversely. Base effects continue to be adverse at least until mid-2019, implying growth will revert to mean in the coming quarters. Cyclical slowdown is bound to extend into 2HFY19 owing to limited fiscal room given the need to meet targets, tight financial conditions (bank lending rates are up 50bps this year, market borrowing costs ~100bp), and weak farm incomes. Easing oil prices will reduce the drag from sub-par trade, but tougher demand conditions and a firmer real rupee will constrain exports, as already visible in the regional trade performance. From 7.7% in 1HFY19 (i.e April to September), we look for India’s 2H real GDP growth to average 6.6%, arriving at our full-year forecast of 7.1%.
Revisions to the backdated GDP series
Backdated GDP series for the years 2004-05 to 2010-11, with 2011-12 as the base year, were presented this month. Along with the Statistics agency, the new numbers also include inputs from the Advisory Committee on National Accounts Statistics (ACNAS), factoring in the change in methodology between the old base year 2004-05 and new 2011-12; the latter has in force since early-2015.
The backdated series carries two main takeaways – firstly growth in the most recent strong phase i.e. 2004-2008 is now lower at 6.7% vs 8% in the earlier series. Secondly, post the global financial crisis, economic growth peaked at 8.5% YoY in 2010-11 under the just-released series, vs 10.8% prior. This points to a slower boost to economic growth from the fiscal stimulus measures in wake of the crisis. The methodological changes involved can be seen here.
Source: Central Statistics agency press release, DBS Group Research
Policy rates on pause
Since the Reserve Bank of India surprised with an on-hold decision in October, rate hike bets continue to be pared back. Inflationary pressures are abating, mainly due to food, which led October inflation to slip to 3.3% YoY, vs target at 4%, with an increasing likelihood that November’s will be below 3%. Friday’s 3Q growth numbers saw the economy expand by a slower 7.1% YoY, vs 2Q’s 8.2%, widening the output gap. There is temporary reprieve on the external front, with rupee appreciating >5% last month and oil prices down by a third between Oct and Nov. With real rates already at elevated levels, there is little urgency for the RBI to tighten policy. We look for a pause on 5 December and rest of FY19, with a downward revision in inflation (prevailing trend is 50-60bps below the central bank’s forecast) and lower full-year growth estimate.
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