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01 Mar 2019


The Indian economy’s growth momentum has come under significant headwinds given the Q3 number being much lower than estimated. Such is the impact that the second Advance Estimate for the current financial has trimmed the overall FY19 growth number by 20 bps to 7% (at basic prices with a base of 2011-12). Acuité was expecting the Q3 number to come at 7.3% and overall FY19 number at 7.4%.

The growth in current terms (nominal) was also somewhat subdued and was recorded at 11%, as compared to the first two quarters of the year, which averaged 12.2%. The lower than expected inflation number is impacting the GDP growth in more ways than one and the effect on the Government’s fiscal space is the most significant concern. While including the first three quarters of the financial year (9 months), it is revealed that the component, Public Administration, Defense and Other Services (PA & DS), grew by just 8.5% as compared to 11.9% in basic prices with a base of 2011-12, same time last year.

This is indeed ironical because in the current circumstances characterized by a retreating private sector, the Government was supposedly on the driver’s seat as Government Final Consumption Expenditure (GFCE) crossed the 10.5% of GDP threshold in recent times. Arguably, the restricted fiscal space is limiting the GFCE as the Government is trying tread a very thin line of fiscal consolidation and Keynesian economics. Not surprisingly, the Government Revenue Receipts (net of interest payments and subsidy) grew by just 9.2% (in first 9 months) as compared to nearly 17% same time last year – pulling down the PA & DS in its wake.      

Talking further about the sectors that make up the GDP number, one of the highest credit offtakes in recent history has led Financial Services, Real Estate and Professional Services to record solid growth in both Q3 as well as 9 month ended FY19. The sector recorded an expansion of 7.3% in the quarter under reference despite NBFC and PCA crises hitting the supply side. Buoyed by high IIP growth numbers in steel and cements segments, the Construction sector, expanded by 9.6% on the other hand. Trade, Hotels, Communications and Transportation along with Electricity sub segments grew moderately with an almost consistent 7% and 8%, respectively. Manufacturing as a whole recorded a solid trajectory with a number of 8.1%. Both private sector topline growth as well as falling WPI deflator are the reasons for the sustenance in the sector despite obvious input and demand pressures.   

Hog Cycles however took a toll on Agro commodities as over supply suppressed both productivity gains and production volumes. The Agriculture, Forestry and Fishing sector expanded by just 2.7% in Q3 while recording an under 3.8% growth in 9 month ended FY19. This is much slower than the near 5% expansion recorded by the sector same time last year on the back of attractive MSPs. Mining and Quarrying was perhaps another sector recording slower than usual numbers. In Q3, the sector expanded by 1.3% and 1.2% in 9 month ended FY19. It must however be noted that production of Coal remains very strong (given the 8% growth recorded by electricity) with a growth of 7.8%; the chief cause of the slowdown is primarily connected to the volatility (falling) in fuel prices, which is in turn impacting Crude and Natural Gas sub-segments.

From the Aggregate Demand perspective, while private consumption (PFCE) and capital formation (GFCF) held on to an extent, overall consumption expenditure suffered. As mentioned earlier, this has its roots firmly attached to the less than expected Government consumption expenditure (GFCE), in the wake of fiscal consolidation under the FRBM mandates. Also, since headline inflation number has been much lower than expected, the lower nominal growth (at current prices) is eating into the available fiscal space as seen in moderating consumption receipts. Despite this, GFCE maintained a higher contribution as a percent to GDP (even though growth slowed down significantly). Capital formation and private consumption also managed to expand their shares with a larger current account deficit balancing things out in the equation.       

We therefore conclude with a revision in our forecast for FY19, that now stands at 7.2%. The trimming of 30 bps portrays our concern regarding the failure of the CPI number to pick-up and a general slowdown in consumption, especially originating from the exchequer. Our expectations for Q4 FY19 are however unchanged at 7.1% along with FY20 forecasts, which is pegged at 7.5%. We believe that the capex cycle should kick in by the end of Q2 next year and help shore up both capital formation as well as government expenditure by way of better revenue receipts (tax revenue). Acuité therefore continues to see robustness in the Indian growth story despite the short term slow down and uncertainties.

GVA Growth (% change YoY)