GDP growth of 5.7% was expected to be higher than in earlier quarters as manufacturing and electricity generation in 1QFY15 were better than in 4QFY14. However, given structural constraints, the expected investment cycle pick-up will take time. Besides, with no monetary policy accommodation expected for a long time, we do not expect FY2015 GDP growth to be any better than 5.6% (higher by 30 bps from our earlier forecast). If the policy momentum continues, FY2016 growth can pick up to ~6%. Read Full Report
2. Industry pushes up 1QFY15 GDP
1QFY15 GDP growth expectedly increased to 5.7%, with a pick-up evident in industrial production to 4.2% (-0.2% in 4QFY14). Manufacturing sector growth was 3.5% (-1.4% in 4QFY14) and electricity sector growth was 10.2% (7.2% in 4QFY14). On the services side, growth was muted at 6.8% (6.4% in 4QFY14), symptomatic of continuing poor consumption demand (Trade, hotel, transport and communication grew by just 2.8%). The saving grace for services was Community, social and personal services, which grew at 9.1%.
On the expenditure side, real private consumption expenditure grew by 5.6%. GFCF grew by 7% on a real basis, sharply reversing a contraction of 0.9% in 4QFY14. However, this data needs to be viewed with some caution as it was against a very low base in 1QFY14.
3. Stabilization in progressmacro-economic numbers appear better
The growth trajectory in FY2015 has started on an improved note, providing the sense that the worst may actually be over. First, the external environment appears better and even as global challenges remain, the degree of risk aversion of the previous years is unlikely to repeat. This implies that exogenous shocks to the domestic economy will be limited. Besides, with improving global growth, exports growth is in positive territory (see Exhibit 1).
On the domestic front, the formation of a stable political system has led to improvement in business sentiment while the PMI has moved to the +50 zone, depicting expansion (see Exhibits 2 and 3). Automobile sales have turned the corner and tourist arrivals have improved (see Exhibits 4 and 5). Financial markets have reacted positively to the new government and this is expected to have a positive impact on the real sector.
4. Challenges remaingrowth-inflation dynamics and natural resource availability
Even as inflation has come off significantly from its peak, the pace of likely contraction in core inflation may be limited. The fear is that with inflation being entrenched in the economy, any rise in consumption or investment demand will once again fuel inflationary pressure in the economy. In this context, it is likely that the monetary policy will remain restrictive and could hurt prospects for economic growth, in a scenario of likely fiscal contraction.
The recent judgment of the Supreme Court that allocation of coal blocks since 1993 are illegal raises the issue of sustaining the growth momentum. Such retrospective action can impact investment sentiment and will have negative implications for the electricity sector and hence manufacturing. In effect, this can derail the economic momentum seen in 1QFY15.
5. The road ahead likely to hard and bumpy
The Union Budget has taken salutary steps to channelize resources to the productive sectors but the positive implications of these steps can be realized only if followed up with micro-economic measures in areas such as labor laws and skills development. All this is expected to take a lot of time and hence FY2015 growth will be restricted to 5.6%, rising to just ~6% in FY2016.
By Kotak Institutional Equities