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2QFY15 GDP finds silver lining in agriculture; industry looks anemic
2QFY15 GDP growth at 5.3% was slower than 5.7% in 1QFY15. For 1HFY15, GDP growth was at
5.5% against 4.9% in 1HFY14. On the production side, the upside surprise partly came from the
agriculture and allied sector with a print of 3.2% in 2QFY15 from 3.8% in the last quarter. In line
with relatively weak IIP in the quarter, industrial growth had a muted print of 2.2% in 2QFY15
after a strong print of 4.2% in the previous quarter. A significant downtick in manufacturing
(0.1% yoy) was probably not surprising, given also the weaker merchandise exports performance
in the quarter ((-)1.6% as per expenditure side data). While mining sector was relatively muted at
1.9%, growth in electricity and construction was buoyant at 8.7% and 4.6%, respectively. While
industrial growth has bottomed, a sharp pick-up may be unwarranted due to the continuing
haziness of investment demand in the economy.
Services sector remains healthy
The growth of 7.1% in services in 2QFY15 was largely driven by ‘financing, insurance, real estate
and business services’ and ‘community, social and personal services’. The former slowed marginally
from 10.4% to 9.5% while the latter (a proxy for government spending) picked up to 9.6% from
9.1% in 1QFY15. ‘Financing, insurance etc.’ also witnessed a robust growth of 9.5% and is
expected to continue to perform better in the future quarters as inflation remains low and some
amount of pick-up in economic activity is seen. We expect services to grow at 7.2% in FY2015.
Consumption provides boost to expenditure-side GDP
On the expenditure side, the drag on growth came from investments and net exports. While gross
fixed capital formation growth was flat, net exports was a drag on GDP growth by 0.8%pt. On the
other hand, consumption demand was supported by 10.1% increase in government consumption,
while private consumption grew at 5.8%. Total consumption expenditure contributed 4.5%pt to
the headline real GDP growth print of 6% at market price.
GDP seen to rise to 5.5% in FY2015
Growth dynamics appear to have bottomed out. Global developments of softer crude oil prices
and commodity prices and the concurrent drop in the retail inflation (especially food) are likely
positive factors that can support a pick-up in overall growth. While industry is expecting some
monetary accommodation to support growth, easier interest rate is just not one factor in the
growth dynamics. Much of the future growth dynamics will depend on the continuation of the
government’s efforts to address the revival of the investment cycle. This will only be possible if the
government is able to address the structural issues in the economy, including labor laws, land
acquisition issues, unlocking capital from stalled projects, all directed towards improvement in the
productivity levels in the economy. For FY2015, we now see a growth of 5.5% (marginally lower
than our earlier estimate of 5.6%). Hoping that there are no adverse global shocks in the next few
months, FY2016 growth is seen at ~6%.
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