November 2015

CRISIL Economy First Cut

Climbing the recovery ladder: GDP at 7.4% in Q2
Overview: Growth has picked up pace in the first half of FY16, on the back of green shoots in manufacturing, modest recovery
in consumption and support from government spending. GDP growth at 7.4% y-o-y in Q2 FY16 was higher than 7.0% in Q1
FY16. Investment growth picked up by 200 basis points while private consumption growth moderated to 6.8% as rural demand
remained muted. Net-exports (exports minus imports) continued to be a drag on growth in the second quarter, albeit the decline
in both exports and imports slowed. On the supply side, as expected, agriculture growth was below trend at 2.2% while the nonagriculture sector rose by 8.1%.
In Q2, nominal growth stood at 6% as inflation measured via the GDP deflator remained subdued at -1.3%. This was in line with
the decline in WPI inflation to -4.5% in Q2.
Looking ahead, we believe that low inflation and easy monetary conditions will remain supportive of growth in the rest of FY16.
Additionally the lagged impact of interest rate reductions will also be felt in the coming quarters. Commodity prices continue to
remain low and are a positive for consumer oriented sectors such as auto. We expect oil prices to average at $ 53.5/barrel in
FY16 and $ 51.5/barrel in FY17.
We expect GDP growth to rise to 7.4% with consumption growth at 7.0% in FY16 (Figure 1). This, we believe, will gradually
improve capacity utilisation rates and lead to revival of private investments by second half of next fiscal. Also, the pay
commission payouts next fiscal will be an extra kicker for consumption and growth.

GDP Data Readings

GDP growth rose to 7.4% in Q2 FY16 from 7% in Q1 FY16. Consumption spending (at 6.8%) lost momentum while
investment spending (6.8%) and government consumption (5.2%) picked up pace in Q2 (Figure 7). Both value of
imports (-2.8%) and exports (-4.7%) declined, albeit the fall was lower than recorded in Q1.

Gross value added (GVA) also picked up to 7.4% y-o-y versus 7.1% in Q1. This was as, both agriculture and
industry growth rose as compared to the previous quarter. Agriculture growth picked up to 2.2% versus 1.9% in Q1.
The production of cereals (-1.8%) and pulses (-1.1%) declined during the recent kharif season, while that for oilseeds
grew at 8.5%. Also, livestock products, forestry and fisheries which account for 51% of total GVA of this sector grew
above 6% in Q2.

Industry growth rose to 6.8% in Q2 FY16 as compared to 6.5% in the previous quarter. This was led by a rise in
manufacturing (9.3%) and electricity, gas, water supply and other utilities (6.7%) (Figure 7).

The service sector grew by 8.8%, slightly lower than 8.8% in Q1 FY16. This was due to lower growth in trade,
hotels, transport, communication and services related to broadcasting (at 10.6%) in comparison to the previous quarter.
That said, service sector performance remained buoyant in Q2 with financial, real estate and professional services
growing at 9.7% and public administration, defence and other services rising by 4.7% ( versus 2.7% in Q1). Overall,
non- agriculture GDP grew by 8.1% in comparison to 8.0% in Q1.

CRISIL Economy First Cut

Nominal GDP slowed to 6.0% in Q2 compared with 8.8% in Q1 due to lower prices. GDP deflator was at -1.3% in
Q2 compared with 1.7% in Q1. This is as inflation measured by the Wholesale price index has declined for food articles
(0.5%), minerals (31.6%), manufactured products (1.8%) and all commodities (4.5%) in Q2. A similar situation was
witnessed in China recently with nominal growth coming in lower than real GDP growth, signalling towards deflationary
pressures in the economy (nominal growth at 6.2% while real GDP growth stood at 6.9% in Q3 2015).

Implication and Outlook

In the first half of this fiscal, GDP growth has risen by 7.2% as the recovery continues. The uptick in Q2 was led by
higher growth in manufacturing, a pickup in investment spending and government consumption.

Private consumption recovery continues to be moderate and fragile as urban demand lifts while rural demand
drags. That said, growth in H1 this fiscal at 7.1% is still higher than same time last year (Figure 2). Lower commodity
prices, inflation and easy monetary policy conditions are gradually supporting demand. We expect this trend to continue
in the remaining part of FY16 and FY17. Commodity prices, especially oil, have continued to remain low. Lower
commodity prices along with easy monetary conditions are a blessing for consumer durables, especially auto sales passenger car sales rose by 21% in October (Figure 5). In addition, growth in consumer oriented sectors in the IIP
manufacturing sub-index picked up by 2.7% between April and September this fiscal as compared to -5.7% same time
last year. However, the consumption recovery is largely due to a pick-up in urban demand as rural demand continues
to remain muted. Two consecutive years of weak monsoon, unseasonal rains and lower MSP increases have all taken
a toll on rural demand.

For rest of FY16, we expect consumption to pick up a notch with lower commodity prices and inflation
improving real purchasing power and somewhat softer interest rates stimulating demand. CRISIL Research
expects oil prices to average at $ 53.5/ barrel in FY16 and drop further to $ 51.5/barrel in FY17. We believe that these
factors will provide the much need trigger for growth as capacity utilisation remains low for now (Figure 6). In addition,
in FY17 we expect the pay commission payouts to provide a boost to consumption and in turn support growth.

Industrial growth, especially manufacturing, also recovered in Q2 as the fall in exports slowed and domestic demand
provided some support. We expect industrial growth to improve further as measures taken by the government to
improve ease of doing business, attract foreign direct investment and reduce bureaucratic red tape all provide support
to industrial activity.

We stick to our forecast of 7.4% GDP growth in FY16 (Figure 1) with 1.5% growth in agriculture and 6.5% growth
in industry. The growth in investment will be largely public sector led as private corporate sector remains shy of
investing.

Risks to growth remain: 1) further fall in exports if global growth remains weak, 2) Fed interest rate hike and 3)
Sharper than expected slowdown in China.

Figure 1: GDP growth to pick up marginally in FY16

BASIC PRICES

2 2

FY13

FY14

FY15

FY16F

MARKET PRICES

FY13

FY14

FY15

FY16 F

GDP

5.1

6.9

7.3

7.4

Agriculture

1.2

3.7

0.2

1.5

Private consumption

5.5

6.2

6.3

7.0

Industry

2.4

4.5

6.1

6.5

Govt. Consumption

1.7

8.2

6.6

6.0

Manufacturing

6.2

5.3

7.1

7.4

Fixed investment

-0.3

3.0

4.6

5.2

Mining & Quarrying

-0.2

5.4

2.4

2.8

Exports

6.7

7.3

-0.8

-1.5

Services

8.0

9.1

10.2

9.8

Imports

6.0

-8.4

-2.1

-6.4

Figure 2: Contribution to GDP growth

Figure 3: Both exports and imports continue to decline

ppt, %yr

%yr

Exports of goods and services

16
Imports of goods and services

35

14

30

12

25

10

20

15

10

5
0

-5

-10

-2

-15

Consumption

Government

Investment

Sep-15

Jun-15

Mar-15

Dec-14

Sep-14

Jun-14

Mar-14

Dec-13

Sep-13

Jun-13

Mar-13

Dec-12

Sep-12

-20

Jun-12

Sep-15

Jun-15

Mar-15

Dec-14

Jun-14

Sep-14

Mar-14

Dec-13

Sep-13

Jun-13

Mar-13

Dec-12

Sep-12

Jun-12

-4

Net Exports

Figure 4: Low inflation has lowered nominal GDP

Figure 5 : Indicators for urban demand turning green

%yr

%yr

12

Commercial Vehicle Sales

70

Passenger Vehicles Sales

10
50

8
6

30

4
10

2
0

-10

GDP deflator

CPI

Sep-15

Jun-15

Mar-15

Dec-14

Sep-14

Jun-14

Mar-14

Dec-13

Sep-13

Jun-13

Mar-13

-50

Dec-12

-6

Sep-12

-30

Jun-12

-4

May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15

-2

WPI

Figure 6: Lead indicators point to a fragile recovery

RBI Business expectations survey (%)

Capacity Utilisation in Manufacturing sector %

(Apr-Jun)

50
76.3
40
74.7
30
73.3

73.1

20
71.6

71.5

10
70.2

Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15

Current Assessment

Expectation

2009

2010

2011

2012

2013

2014

2015

CRISIL Economy First Cut

Figure 7: Quarterly growth rates

%, y-o-y

Q4
FY15

Q4
FY15

Q1 FY16

Q2 FY16

GDP

7.5

7.0

7.4

Private consumption

7.9

7.4

6.8

-7.9

1.2

5.2

4.1

4.9

6.8

Exports

-8.2

-6.5

-4.7

Imports

-8.7

-5.4

-2.8

Q1 FY16

Q2 FY16

-1.4

1.9

2.2

Industry

5.6

6.5

6.8

Govt Consumption

Manufacturing

8.4

7.2

9.3

Fixed investment

Mining & Quarrying

2.3

4.0

3.2

Services

9.2

8.9

8.8

Agriculture

%, y-o-y

For all charts and tables: Note: F= Crisil Forecasts

Source: CSO, CEIC, RBI, CRISIL Research

Analytical Contacts:
Dharmakirti Joshi

Sakshi Gupta

Chief Economist, CRISIL Ltd.

Economist, CRISIL Ltd.

Email:dharmakirti.joshi@crisil.com

Email: sakshi.gupta@crisil.com

Media Contacts:
Tanuja Abhinandan

Jyoti Parmar

Media Relations

Media Relations

Email: tanuja.abhinandan@crisil.com

Email: jyoti.parmar@crisil.com

Phone: +91 22 3342 1818

Phone: +91 22 3342 1835

4 4

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Last updated: August, 2014

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