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15 Nov 2019


Market is awaiting a recovery of sorts and anticipating when the economic growth will regain its lost trajectory. The GDP growth, which is in a downward trend for past five quarters had reached 5% in Q1FY20. The economic outlook is expected to remain steady in Q2 as well with 5.1% as per Acuité projection. However, there is a higher risk towards the downward side as our major concern pertains to de-growth in manufacturing IIP, which in turn is highly correlated with the GVA, to the tune of almost 80%. Moreover, fall/rise in IIP (manufacturing) result in sharp fall/rise in GVA (manufacturing). This is because change in unit production of higher value adding sectors (such as automobile & electronic goods) are causing a substantial impact on the GVA.

Resultantly, contraction in higher value adding sectors such as automobile and electronic goods and mild growth in pharmaceutical sector will undermine the growth in manufacturing GVA. We therefore believe that the main culprit in a weak GDP number will be the sharp contraction in manufacturing IIP. Notwithstanding, strong growth in government expenditure is expected to marginally offset the contraction in manufacturing.

As per our analysis based on high frequency data, 4 out of 13 leading indicators are better than the preceding year, in comparison. Moreover, 7 indicators are performing better than the previous quarter – indicating bottoming out scenario. Also worth noting are the signs of improvement seen in investment, which is expected to change the sentiment in coming quarters. As far as parameters are concerned, fuel consumption and air passenger traffic are the strong leading indicators of the economic activities in India. We note that while fuel consumption has been stronger than the previous year, air passenger flow is continuing its downward trend. Any final assessment however is too early and reserve our judgement until official data is released.

Source: MOSPI; Acuité Research

Within year correlation between manufacturing IIP and GVA

Source: MOSPI; Acuité Research