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11 Jun 2018


The updated and optimized series for Capital Goods resulted in a major recovery for the category. The segment has been expanding at 6.7% on an average over the last three months and 4.4% overall in FY18. As compared to FY17, the growth is stronger by over 100 bps. The solid expansion in the category has aided the performance of the Gross Fixed Capital Formation (GFCF), which has been languishing because of a poor capex cycle and inching up inflation. GFCF however expanded by 14.9% in Q4 FY18, taking overall category expansion to 9.6%. This is a paradigm shift given the fact that not long ago, GFCF was a laggard and was treated as a deflator at best. Items that are defining this new found growth include manufacturing and electricity/allied sectors, which added value (GVA) at the rate of 5.7% and 7.2%, respectively in FY18 overall. In Q4, while manufacturing expanded by 6.1% (7.7% in Q3), electricity and allied growth doubled to 6.6% (3.3% in Q3).

The new found confidence has its roots firmly attached in Government Expenditure (Public Administration and Others) expansion of 16.8% in Q4 and 10.9% overall in FY18. Fiscal expansion has been an important barometer of this variable. At 3.53%, India's fiscal deficit has expanded by nearly 11% YoY along with the size of the economy. The FRBM mandates are however at risk at this time as the 20 bps ‘escape clause' has been utilized.

While discussing the performance of the three main sectors, agriculture allied, industry and services expanded by 3.1%, 7% and 1.4% respectively in Q4. The dismal performance of the service sector was however offset by strong Q1 growth of near 19%. The sector has been hit by the Government's formalization initiatives and ended the year with a strong growth of 7.9%.

On a macro level, consumption has maintained its level largely helped by consumer non-durables and implications of the 7th Pay Commission. However, in terms of per capita, consumption has weakened. Per Capita GDP growth has declined to 5.3% in FY18 as compared to 5.8% the previous year. Per Capita Private Consumption Expense (PCPCE) on the other hand, expanded by 5.2% in FY18 as compared to 5.9% in FY17. This anomaly signals a disengagement between macro growth and individual wellbeing. Cheaper capital and availability of low skills leads to insignificant factor productivity and thus lower per capita growth in most parameters. The Government's efforts in skilling and digitization is expected to be a game changer here. A renewed capex cycle as well as inflation (especially core) on the other hand has resulted in capacity utilization levels reaching near the 80% mark - signaling a recovery of sorts overall.

Major concerns for us however are factors such as unstable external sector, which in turn is impacted by US led trade war and the rising interest rates (impacting Indian and EM yields) in the developed world. The Twin Balance Sheet problem, largely driven by the NPA situation is another ambiguity, plaguing macro stability as per our assessment.

 BE FY18Actual FY18Actual FY17% change in FY18
Fiscal deficit59484959166353506810.6
Subsidy % of GDP1.37%1.14%1.35% 
Fiscal Deficit % of GDP3.55%3.53%3.51% 
* amount in Rs Crore  

Growth in GVA:

 Q1'FY18Q2'FY18Q3'FY18Q4'FY18Share in Q4 growth (in bps)Annual Growth FY18
Overall GVA6.015.556.136.6210006.5
Sub-sector of Industry
Electricity & Others-3.901.833.136.57247.2
Sub-sector of Service
Trade, hotel & Others5.538.368.508.512348.0
Finance, real estate & Others1.008.436.076.922226.6
Public Admn& Others16.4113.526.087.6619410.0

Growth in GDP:

Q1'FY18Q2'FY18Q3'FY18Q4'FY18Share in Q4 Growth (in bps)FY18
Overall GDP5.596.37.07.71,0006.7
Private Consumption6.946.85.96.74766.6
Govt. Expenditure17.623.86.816.819110.9
Gross Capital Formation5.

Estimate of share in growth does not sum 1000 due to discrepancies