India’s GDP eases to 7.7% in Q1-FY12

The impact of higher interest rates, rising prices and policy paralysis was clearly reflected in the GDP release for Q1-FY12 (April-June 2011). Growth eased to 7.7% y/y from 7.8% in Q4-FY11, showing a downward trend in economic activity – particularly given that the Q4-FY11 number is likely to be revised higher once the revised Index of Industrial Production series is incorporated.

There are a few key takeaways from the Q1-FY12 print. First, it indicates a slowdown, not a collapse, in economic activity. Second, the growth moderation is not yet broad-based. For instance, while industry slowed sharply, the services sector was resilient. Finally, external demand continued to play an important role in supporting growth. Should global trade weaken in the next few quarters, this source of support may fade.

On the expenditure side, private consumption growth was much weaker than earlier data suggested – a worrying sign. While investment activity also slowed, this was not surprising, as headwinds such as higher interest rates, inflation and policy paralysis would have impacted investment decisions. The pronounced weakness in consumption at the beginning of the fiscal year raises the risk of much slower investment activity than currently expected. We will be watching the private consumption trend closely to gauge whether a review of our GDP forecast is warranted. For now, we maintain our FY12 growth forecast of 7.7% y/y.

Broad trends
A comparison of the Q1-FY12 data with the year-earlier period reveals the following trends:
Consumption and investment slowed significantly. Private consumption growth slowed to 6.3% y/y in Q1-FY12 from 9.5% y/y in Q1-FY11, and investment growth slowed to 7.9% y/y from 11.1% y/y. The weakness in private consumption is of particular concern, as consumer demand had been expected until now to hold up well. The revised data based on the new IIP series paints a very different picture from the earlier data series. It shows that consumer demand has slowed more dramatically than the previous series or other proxy indicators had suggested. Since consumers are the major driver of India’s growth – household expenditure accounts for 60% of GDP – such a significant slowdown, if sustained, could push GDP growth even lower than expected.

However, because we do not have the revised GDP figures for Q2, Q3 and Q4-FY11, it is unclear whether the weak Q1-FY12 private consumption print was a one-time occurrence or part of a sustained trend. A sustained slowdown in consumption would negatively affect the investment outlook in a feedback loop.

Support from external demand was strong in Q1-FY12, in line with monthly trade data since late 2010. Going forward, however, this source of support might fade as external demand weakens.
Government expenditure was not as strong as it was a year earlier. Still, when compared to periods of fiscal consolidation (i.e., prior to the global financial crisis), the economic impetus from fiscal policy was not negligible.

On a sectoral basis, growth in industry slowed significantly, to 5.1% y/y from 9.1% in Q1-FY11. However, this was not broad-based across all industries. Growth in the construction and mining sectors slumped to about 1% y/y in Q1-FY12 from 7.5-8.0% in Q1-FY11. The dismal performance of the mining sector reflects disappointing gas production from the Krishna-Godavari basin, which was already known to the market. However, the slump in construction came as a shock. Though we knew that policy paralysis was having an impact on infrastructure investment, the pace of the slowdown was unexpectedly sharp.

The picture in the services sector was mixed. Higher interest rates impacted activity in the ‘financing, real estate and insurance’ segment. However, other segments held up well, allowing the services sector as a whole to record 10.0% growth, versus 10.4% in Q1-FY11.