After A Weak 2QFY17, Expect A Mild Pick-Up In GDP Growth by AMBIT
An analysis of 17 high frequency indicators (HFIs) and India’s Keqiang Index (IKI) for India suggests that economic momentum in India decelerated further in 2QFY17, marking an 11-quarter low on the IKI front. The HFIs further suggest that ‘consumption’ as a theme continues to do well whilst ‘investment’ remains under pressure. In the short term, we expect higher agricultural sector growth in 2HFY17 and the award of the 7th Pay Commission to propel a mild U-shaped consumption-driven pick-up in GDP growth in 2HFY17. From a medium-term perspective, for FY18, we expect GDP growth to be recorded at 7.3% YoY (v/s 6.8% in FY17) as the “M+R+T resets” lend support to consumption growth (click here for the October 04, 2016 thematic).
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Economic activity levels dropped further in 2QFY17
An analysis of 17 high frequency indicators suggests that 11 out of 17 indicators decelerated in 2QFY17 as compared to 8 indicators losing steam in 1QFY17 (see exhibit A). Most notably, growth in the commercial vehicles sales component contracted by 6% YoY in 2QFY17 as compared to the growth of 15% YoY recorded in 1QFY17. India’s Keqiang Index (IKI) also
experienced a deceleration in 2QFY17 (see exhibit B), thereby corroborating the message conveyed by the battery of 17 high frequency indicators that we track.
‘Consumption’ holding up relative to ‘investment’
Data for 2QFY17 suggests that gauges related to consumption (such as two-wheeler sales and passenger vehicle sales) continue to do well. On the contrary, investment as a theme continues to stay under pressure as evinced by the persistent weakness in gauges like commercial vehicles sales, cement and coal production. Within consumption, early signs of rural consumption stabilizing are evident from the fact that rural wages are bottoming out and rose by 10bps whilst two-wheeler sales rose by 300bps in 2QFY17. Furthermore, WPI core inflation was recorded at an 8-quarter high while CPI core inflation also inched up, pointing to early signs of the return of pricing power.
Where do we go from here?
In the short term, we expect higher agricultural sector growth in 2HFY17 and the award of the 7th Pay Commission to propel a mild U-shaped consumption-driven pick-up in GDP growth. From a medium-term perspective, for FY18, we expect GDP growth to be recorded at 7.3% YoY (vs 6.8% in FY17) as the “M+R+T resets” lend support to consumption growth (click here for our October 04
It is critical to note that ‘investment growth’ is likely to stay under pressure as: (1) the Government has budgeted extremely low capex growth for FY17 (4% vs 21% in FY16); and (2) there are no signs of a private sector capex revival.
As highlighted above, both short-term and medium-term catalysts are likely to support consumption growth in India. In the short term, higher agricultural income in 2HFY17 fuelled by a good monsoon and the 7CPC payout being initiated in August 2016 should incrementally support consumption growth in 2HFY17. From a medium-term perspective, as cost of capital falls along the lines described in our note titled “M+R+T resets = A revolution in access”, we are likely to see an upsurge in credit-funded consumption growth. Alongside that, as access to end-consumers improves for manufacturers, improved selling reach will also enhance consumption. Out top picks on the theme of enhanced consumption are Asian Paints, Havells, TTK Prestige and Trent.
Section 1: High frequency indicators suggest that the economy decelerated further in 2QFY17
Data for 2QFY17 suggests that 11 of 17 high frequency indicators lost steam in 2QFY17 compared to 1QFY17 (see exhibit below).
Furthermore, a historical analysis of these gauges suggests that the number of indicators slowing on a sequential basis hit a 6-quarter high in 2QFY17 (see exhibit below).
- Sectoral indicators: 6 of 8 sectoral indicators lost momentum in 2QFY17. Sectoral indicators include passenger vehicles sales, commercial vehicle sales, two-wheeler sales, tractor sales, electricity generation, bitumen production, coal production and cement production
- Macro indicators: 5 of 9 macro indicators lost momentum in 2QFY17. Macro indicators include core CPI, core WPI, bank deposits, non-oil bank credit, retail credit, rural wages, petroleum products consumption, non-oil exports and revex less interest payment.
India’s Keqiang Index (IKI) for 2QFY17 also suggests that the economy lost momentum in this quarter as compared to 1QFY17 (see exhibit below).
In specific, the IKI in 2QFY17 was recorded at -4.8% YoY (compared to -3.2% YoY in 1QFY17) (see exhibit above), marking an 11-quarter low in the reading of the IKI.
In terms of the thematic takeaways, three points are worth noting, namely:
Theme#1: ‘Consumption’ holding up relative to ‘investment’
Data for 2QFY17 suggests that gauges related to consumption such as two-wheeler sales and passenger vehicle sales continue to do well (see exhibit below).
On the contrary, investment as a theme continued to stay under pressure as evinced by the persistent weakness in gauges like commercial vehicles sales, electricity generation and cement dispatches (see exhibit above).
Theme#2: Rural consumption shows signs of stabilizing
Within consumption, early signs of rural consumption stabilizing were evident from the fact that rural wages are bottoming out and rose by 10bps whilst two-wheeler sales rose by 300bps in 2QFY17 (see exhibit below).
Theme#3: Early signs of pricing power returning
Core WPI was recorded at an 8-quarter high while core CPI also inched up marginally in 2QFY17, pointing to early signs of pricing power improving in the economy (see exhibit below).
Section 2: Expect a U-shaped recovery, GDP growth likely to have bottomed-out in 2QFY17
In our note dated July 22 titled ‘Economic Momentum decelerated decisively in 1QFY17’ we made the point that economic growth in FY17 will be flat compared to FY16. Specifically, we expect GDP growth in FY17 to be recorded at 6.8% YoY, i.e. unchanged from GDP growth recorded in FY16.
In our note dated October 4 titled ‘M+R+T resets=Revolution in Access’, we then made the point that, “Whilst the M+R+T resets have been disruptive in the short run (resulting in a systematic compression in earnings growth), in this note we describe how the range of policy decisions triggered by Modi, Rajan and Technology has set off a silent revolution in ‘access’”. We further made the point that GDP growth is likely to undergo a consumption-driven improvement and we expect GDP growth in FY18 to be recorded at 7.3% YoY thereby marking a sequential acceleration of 50bps.
In the subsequent part of this section we highlight why we believe that in all probability GDP growth bottomed out in 2QFY17 and why a strictly consumption growth fuelled recovery is likely to materialize hereon even as investment growth remains under strain.
Section 2.1: Consumption growth is likely to pick-up hereon
The second half of FY17 is likely to experience stronger consumption growth than that seen thus far as:
(1) Agriculture production is typically stronger in the second half of a fiscal year and there is a strong correlation between agricultural sector output and overall consumption demand. A normal monsoon after two consecutive droughts should result in higher agricultural output and should add to a mild pick-up in consumption in 2HFY17.
(2) The Seventh Central Pay Commission award will not lead to a significant increase in sale of durables such as passenger vehicles (PVs) to the extent that it did after the sixth pay commission award. However, a mild tailwind for small ticket consumption items is expected as ~16% hike in government workers’ salaries has been executed (excluding the effect of the allowances).
Reason#1: Agricultural sector growth is typically concentrated in 2H
The data for agricultural sector output suggests that the agricultural production is always higher in the second half as compared to the first half since the kharif crop is harvested in 2H of a financial year (see exhibit below).
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