GROSS DOMESTIC PRODUCT GDP growth slips to a 15-quarter low 4.5% in Q3FY13 on account of moderating growth of services ICRA RESEARCH SERVICES

March 2013 OVERVIEW

OVERVIEW India’s gross domestic product (GDP) at factor cost (constant prices) expanded by a sluggish 4.5% in year-on-year (y-o-y) terms in Q3FY13, inferior to market and our expectations (~4.9%) reflecting a slower-than-anticipated growth of the services sector (6.1% vs. our expectations of 6.8%). The pace of growth of economic activity has weakened further in Q3FY13 after remaining between 5.1-5.5% in the previous three quarters, led primarily by a deteriorating performance of the services sector.

Contacts: Aditi Nayar +91 124 4545 385 [email protected]

The moderation in GDP growth to 4.5% in Q3FY13 from 6.0% in Q3FY12 was led by the agriculture & allied and services sectors, even as the industrial sector displayed a small uptick. Service sector growth eased to 6.1% in Q3FY13 from 8.3% in Q3FY12, primarily reflecting a considerable decline in the pace of growth of financing, insurance, real estate & business services (7.9% in Q3FY13, 11.4% in Q3FY12) and trade, hotels, transport and communication (5.1% in Q3FY13, 6.9% in Q3FY12). In addition, the pace of growth of community, social & personal services eased to 5.4% in Q3FY13 from 6.8% in Q3FY12. Moreover, a decline in the growth of agriculture & allied activities to 1.1% in Q3FY13 from 4.1% in Q3FY12, reflecting the shortfall in kharif production in 2012, acted as a drag on overall GDP growth. Industrial growth improved slightly, albeit to a sluggish 3.3% in Q3FY13 from 2.6% in Q3FY12, reflecting the performance of manufacturing (2.5% in Q3FY13; 0.7% in Q3FY12) and mining & quarrying (-1.4% in Q3FY13; -2.6% in Q3FY12). However, this was partly offset by a weakening growth of electricity, gas and water supply (4.5% in Q3FY13; 7.7% in Q3FY12) and construction (5.8% in Q3FY13; 6.9% in Q3FY12). Table 1: Growth of GDP & Components (in %, constant 2004-05 prices, y-o-y) Q3FY12 Q4FY12 Q1FY13 4.1% 2.0% 2.9% Agriculture & Allied 2.6% 2.1% 3.6% Industry 8.3% 7.3% 7.0% Services 6.0% 5.1% 5.5% GDP at factor cost Q3FY12 Q4FY12 Q1FY13 9.2% 9.7% 2.0% Private Final Consumption Expenditure 8.1% 7.6% 8.3% Government Final Consumption Exp. 10.2% 13.4% 7.2% Exports 24.0% 24.3% 3.9% less Imports -1.7% 2.6% -4.6% Gross Fixed Capital Formation 5.8% 5.2% 3.8% GDP at market prices Source: Central Statistics Office (CSO); ICRA Estimates

Q2FY13 1.2% 2.7% 7.2% 5.3% Q2FY13 2.0% 8.0% 5.2% 13.8% -1.0% 2.7%

Q3FY13 1.1% 3.3% 6.1% 4.5% Q3FY13 4.6% 1.9% -2.1% -0.3% 6.0% 4.1%

2011-12 3.6% 3.5% 8.2% 6.2% 2011-12 8.0% 8.6% 15.3% 21.5% 4.4% 6.3%

9MFY13 1.7% 3.2% 6.7% 5.0% 9MFY13 2.9% 5.7% 3.3% 5.6% 0.1% 3.6%

Growth of GDP at market prices (at constant 2004-05 prices) slowed from 5.8% in Q3FY12 to 4.1% in Q3FY13. This was lower than the 4.5% growth of GDP at factor cost in the same quarter, led by a 0.7% de-growth in indirect taxes less subsidies. Growth of Government final

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consumption expenditure (GFCE) slowed sharply to 1.9% in Q3FY13 from 8.1% in Q3FY12, in line with the fiscal tightening being undertaken by Government of India (GoI). While the unfavourable monsoon in 2012 dampened consumer demand and contributed to an inferior growth of private final consumption expenditure (PFCE) in Q3FY13 (4.6%) relative to the healthy 9.2% growth in Q3FY12, this represents an uptick relative to the 2% growth in H1FY13, suggesting a slight improvement in consumer sentiments. In contrast, the pace of growth of gross fixed capital formation (GFCF) improved to from 6.0% in Q3FY12 from a revised de-growth of 1.7% in Q3FY13, partly reflecting the base effect. Notably, growth of GFCF has been revised sharply to -4.6% for Q1FY13 (from +0.7%) and -1.0% for Q2FY13 (from +4.1%) while that of PFCE has been revised downwards to 2.0% for Q1FY13 (from 4.0%) and 2.0% for Q2FY13 (from 3.7%). Despite the 41% increase in nominal gold imports in US$ terms in Q3FY13 (in y-o-y terms), valuables expanded by a low 2% in Q3FY13 relative to Q3FY12 at current prices. Data released by the CSO indicates that exports rose by 6% whereas imports expanded by 8% in Q3FY13 (at current prices). However, the drag imposed by negative net exports moderated in Q3FY13 relative to the previous quarter. Chart 1: Y-o-Y Growth in GDP (constant 2004-05 prices) 14%

Chart 2: Y-o-Y Growth in Agriculture, Industry and Services (constant 2004-05 prices) 20%

12% 15%

10% 10%

8% 6%

5%

4% 0%

2% 0%

-5%

GDP at factor cost

GDP at market prices

Agriculture & Allied

Industry

Services

Source: CSO; ICRA Analysis

OUTLOOK: Favourable rainfall in the ongoing quarter is expected to provide a limited boost to agricultural growth and hydroelectricity generation in Q4FY13 as compared to the previous quarter. Moreover, agriculture typically forms a lower proportion of GDP in Q4 as compared to Q3 (as the kharif harvest is recorded in Q3); accordingly, we expect a lower drag from agricultural growth in Q4FY13. As compared to the 1.2% manufacturing growth in 9MFY13, a favourable base effect is expected to boost industrial growth in Q4FY13. Overall, GDP growth is expected to improve in Q4FY13 relative to the estimated 15-quarter low 4.5% in Q3FY13. Notwithstanding this anticipated uptick, economic growth is likely to be sluggish at 5.0-5.2% in FY13. With the Union Budget for 2013-14 indicating compliance with the fiscal targets for 201213 and 2013-14, we expect the RBI to cut the Repo rate by 25 basis points in the mid-quarter policy review in March 2013 to bolster business sentiments and economic growth.

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GDP AT FACTOR COST BY ECONOMIC ACTIVITY Moderation in GDP growth led by services and agriculture: Real GDP growth at factor cost moderated to 4.5% in Q3FY13 from 6.0% in Q3FY12, reflecting a moderation in the pace of growth of the services and agriculture & allied sectors, offset by a slight pickup in industrial growth. In sequential terms, the pace of GDP expansion eased to 4.5% in Q3FY13 from 5.3% in Q2FY13.

Chart 3: Y-o-Y GDP Growth and its Composition (constant prices) 7% 6.0% 6%

5.1%

5.5%

5.3%

5%

4.5%

4% 3%

Service sector growth moderates further: The services sector expanded by 6.1% in Q3FY13, slower than the 8.3% growth in Q3FY12 and the 7.2% rise in Q2FY13.

2% 1%

Growth of financing, insurance, real estate & business services (FIRB) eased to 7.9% in Q3FY13 from 11.4% in Q3FY12 and 9.4% in Q2FY13. Nevertheless, this remained the fastest growing sub-sector of the services sector in Q3FY13. The growth moderation reflects the easing pace of growth of non-food bank credit (to 14.9% at end-Q3FY13 from 15.4% at end-Q2FY13) and bank deposits (to 11.1% from 13.8%, respectively) in y-o-y terms. However, inflows from foreign institutional investors (FIIs) underwent a healthy expansion in Q3FY13 (US$ 10.36 billion) relative to both Q2FY13 (US$ 6.67 billion) and Q3FY12 (US$4.24 billion). The contribution of FIRB to GDP growth declined to 1.4% in Q3FY13 from 2.0% in Q1FY13 and 1.8% in Q2FY13. The pace of growth of trade, hotels, transport and communication (THTC) declined to 5.1% in Q3FY13 from 6.9% in Q3FY12 and 5.5% in Q2FY13. The pace of growth of commercial vehicles production, railway freight and cargo handled through major ports has deteriorated in sequential quarters in Q3FY13. The contribution of THTC to GDP growth declined to 1.3% in Q3FY13 from 1.5% in Q2FY13. The pace of growth of community, social & personal services (CSPS), which includes public administration & defence and other services, declined to 5.4% in Q3FY13 from 6.8% in Q3FY12, partly reflecting the 1% decline in GoI’s revenue expenditure in Q3FY13. The contribution of CSPS to GDP growth declined to 0.7% in Q3FY13 from 1.0% in Q2FY13. The contribution of services to GDP growth declined to 76% in Q3FY13 from 83% in Q2FY13, with the sector accounting for 3.4% of the 4.5% growth in Q3FY13.

0% Q3FY12 Services

Q4FY12 Industry

Q1FY13

Q2FY13

Agriculture & Allied

Q3FY13

GDP factor cost

Source: CSO; ICRA Analysis

Chart 4: Y-o-Y Services Growth and its Composition (constant prices) 10% 8.3% 8%

7.3%

7.0%

7.2%

6.1%

6% 4% 2% 0% Q3FY12

Q4FY12 Q1FY13 Q2FY13 Trade, Hotels, Transport & Communication Financing,Insurance,Real Estate & Business Services Community,Social & PersonalServices Services

Q3FY13

Source: CSO; ICRA Analysis

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Sequential rise in industrial growth led by manufacturing and electricity: Industrial growth improved to 3.3% in Q3FY13 from 2.6% in Q3FY12. The pickup in sequential quarters (to 3.3% in Q3FY13 from 2.7% in Q2FY13) primarily reflects an improvement in growth of manufacturing (to 2.5% from 0.8%) and electricity, gas & water supply (to 4.5% from 3.4%). However, the performance of mining & quarrying (to -1.4% in Q3FY13 from +1.9% in Q2FY13) and construction (to 5.8% in Q3FY13 from 6.7% in Q2FY13) worsened on a sequential basis. Overall, the industrial sector contributed a low 0.9% of the 4.5% GDP growth in Q3FY13. Manufacturing growth improved marginally to 2.5% in Q3FY13 from 0.7% in Q3FY12 and 0.8% in Q2FY13. Disaggregated data from the Index of Industrial Production (IIP) indicates that capital goods recorded a de-growth of 1% in Q3FY13, an improvement relative to the 8% contraction in Q2FY13. Additionally, basic goods, intermediate goods and consumer durables displayed a slight pickup in growth in Q3FY13 (2.7%, 2.4% and 3.2%, respectively) relative to Q2FY13 (2.2%, 1.5% and 0.1%, respectively). The contribution of manufacturing to GDP growth remained low at 0.4% in Q3FY13. The growth of electricity, gas & water supply improved to 4.5% in Q3FY13 from 3.4% in Q2FY13 but remained inferior to the 7.7% growth in Q3FY12. Belowaverage rainfall contributed towards a 19% de-growth of hydroelectricity generation while thermal electricity generation displayed a healthy 8% growth in Q3FY13 (Source: Central Electricity Authority). In line with our expectations, the pace of growth of construction activities declined to 5.8% in Q3FY13 from 10.9% in Q1FY13 and 6.7% in Q2FY13, reflecting the anticipated shortfall in the kharif harvest and its associated impact on rural demand for construction. The contribution of construction to GDP growth stood at 0.4% in Q3FY13. The easing of home loan rates by some Banks in recent months may provide a demand-side boost to the sector going forward.

Chart 5: Y-o-Y Industrial Growth and its Composition (constant prices) 4%

3.6%

3.3%

4% 3%

2.7%

2.6% 2.1%

3% 2% 2% 1% 1% 0% -1% Q3FY12

Q4FY12

Mining & Quarrying

Construction

Q1FY13 Manufacturing

Q2FY13

Q3FY13

Elect. Gas & Water Supply

Industry

Source: CSO; ICRA Analysis

Chart 6: Y-o-Y Growth of Domestic Production of Coal, Crude Oil and Natural Gas 15.0% 10.0% 5.0% 0.0% -5.0%

-10.0% -15.0%

The performance of the mining & quarrying sector worsened with a de-growth of 1.4% in Q3FY13 (-2.6% in Q3FY12) from a growth of 1.9% in Q2FY13 (-5.3% in Q2FY12), partly reflecting the base effect. Moreover, the weakness in the mining sector reflects the deterioration in the growth of coal output (to 1.5% in Q3FY13 from 10.6% in Q2FY13); worsening de-growth of natural gas output (to 15.0% in Q3FY13 from 14.0% in Q2FY13) on account of issues related to the production of gas from the Krishna-Godavari Basin; and suspension of iron ore mining in Goa and in some regions of Odisha.

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-20.0%

Coal

Crude Oil

Natural Gas

Source: CSO; ICRA Analysis

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Low precipitation in June-July 2012 contributed to a delay in the sowing of kharif crops. Despite a pickup in the magnitude of rainfall from mid-August to midSeptember 2012, total precipitation was 8% below the long period average in the monsoon period. The unfavourable magnitude and temporal distribution of rainfall dampened yields of some crops. The Second Advance Estimates of Crop Production for the kharif crop of 2012 indicate a decline in the output of coarse cereals (12%), pulses (10%), sugarcane (7%), oilseeds (6%), cotton (4%) and rice (2%) relative to the final production figures for 2011-12.

Chart 7: Deviation of Monsoon Rainfall from normal in 2012 80

Post-Monsoon

Monsoon

70

60 Rainfall in mm

Agricultural growth moderates in Q3FY13: The pace of growth of agriculture & allied activities moderated to 1.1% in Q3FY13, when the kharif crop was harvested, from 4.1% in Q3FY12 reflecting the unfavourable extent and temporal distribution of monsoon rainfall. Nevertheless, agricultural growth was higher than our expectation of a marginal 0.5% expansion in Q3FY13.

50

40 30

20 10 0

Normal

Actual

Source: IMD; ICRA Analysis

EXPENDITURE OF GDP AT MARKET PRICES Growth of real GDP at market prices improves to 4.1% in Q3FY13: Expenditures of GDP at market prices (at constant 2004-05 prices), reflecting the demand side factors, expanded 4.1% in Q3FY13, as compared to 2.7% in Q2FY13, nevertheless remaining lower than the 5.8% growth recorded in Q3FY12. The pace of growth of GDP at market prices was lower than GDP growth at factor cost (4.5%), reflecting the 0.7% de-growth in indirect taxes less subsidies in Q3FY13.

Chart 8: Y-o-Y Growth of PFCE and GFCE (constant 2004-05 prices) 12% 10% 8%

Growth of private consumption expenditure improves in sequential terms: Private final consumption expenditure (PFCE) expanded by 4.6% in Q3FY13, substantially weaker than the 9.2% growth recorded in Q3FY12. This reflects the unfavourable monsoon in 2012, which dampened incomes in rural India. Additionally, elevated food inflation of around ~9% in Q3FY13 eroded the disposable incomes of households, dampening purchasing power. However, growth improved somewhat from 2.0% each in Q1FY13 and Q2FY13, suggesting that consumer sentiments have improved somewhat in recent months. PFCE as a proportion of GDP (at current prices) improved marginally to 59.1% in Q3FY13 from 61.4% in Q3FY12 and 58.3% in Q2FY13.

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6% 4% 2% 0%

Q2FY12

Q3FY12

Q4FY12 PFCE

Q1FY13

Q2FY13

GFCE

Source: CSO; ICRA Analysis

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Q3FY13

Improved growth of gross fixed capital formation reflects base effect: Gross fixed capital formation (GFCF) expanded by 6.0% in Q3FY13, relative to the contraction recorded in Q1FY13 (4.6%) and Q2FY13 (1.0%). However, this improvement reflects the base effect, with a 1.7% de-growth in Q3FY12, with no visible signs of a pickup in investment activity. Notwithstanding the improvement in growth based on CSO’s data for Q3FY13, growth of GFCF remains marginal at 0.1% in April-December 2012. With existing projects getting implemented; several projects stalled on account of regulatory issues; and a lag in announcement of new projects subsequent to the reforms announced by GoI, the investment pipeline has dwindled, which is a cause of concern.

Chart 9: Y-o-Y Growth of GFCF (constant 2004-05 prices) 8% 6% 4%

2% 0%

-2%

GFCF as a proportion of GDP (at current prices) stood at 28.7% in Q3FY13, similar to the level in Q3FY12 (28.8%), but remained weaker than the level in Q2FY13 (30.6%). While previously released data had indicated a 1.2% and 0.1% decline in inventories in Q1FY13 and Q2FY13, respectively data released now by CSO indicates a 49-51% growth in the first three quarters of FY13 following a sharp revision in the quarterly data for FY12.

Sharp decline in growth of government consumption expenditure reflecting fiscal tightening: The pace of growth of government final consumption expenditure (GFCE) declined sharply to 1.9% in Q3FY13 from 8.1% in Q3FY12 and 8.0% in Q2FY13. This reflects the 1% decline in GoI’s revenue expenditure in Q3FY13 relative to Q3FY12 according to data released by the Controller General of Accounts.

-4% -6% Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Source: CSO; ICRA Analysis

Chart 10: Y-o-Y Growth of Exports and Imports (constant 2004-05 prices) 30% 25% 20% 15%

Moderation in growth of exports and imports: Data released by CSO indicates a contraction in exports and imports in Q3FY13 at constant 2004-05 prices. However, the drag imposed by negative net exports eased in Q3FY13 relative to the previous quarter.

10% 5%

0% -5%

Moreover, at current prices, the pace of growth eased considerably in sequential quarters for both exports (to 5.7% in Q3FY13 from 14.1% in Q2FY13) and imports (to 8.3% in Q3FY13 from 24.3% in Q2FY13). Data released by the Ministry of Commerce & Industry, GoI indicates a slowdown in the growth of merchandise exports from 6.3% in Q2FY13 to 3.5% in Q3FY13 in Rupee terms. Moreover, growth of merchandise imports from 17.5% in Q2FY13 to 13.4% in Q3FY13 in Rupee terms.

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Q2FY12

Q3FY12

Q4FY12 Exports

Q1FY13

Q2FY13

Imports

Source: CSO; ICRA Analysis

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Q3FY13

ANNEXURE A: Table 3: GDP & its components (y-o-y growth, constant 2004-05 prices) Q3FY12 Q4FY12 6.0% 5.1% GDP at factor cost 4.1% 2.0% Agriculture & Allied 2.6% 2.1% Industry -2.6% 5.2% Mining & Quarrying 0.7% 0.1% Manufacturing 7.7% 3.5% Electricity, Gas & Water Supply 6.9% 5.1% Construction 8.3% 7.3% Services 6.9% 5.1% THTC 11.4% 11.3% FIRB 6.8% 6.8% CSPS Source: CSO; ICRA Analysis

Q1FY13 5.5% 2.9% 3.6% 0.1% 0.2% 6.3% 10.9% 7.0% 4.0% 10.8% 7.9%

Q2FY13 5.3% 1.2% 2.7% 1.9% 0.8% 3.4% 6.7% 7.2% 5.5% 9.4% 7.5%

Q3FY13 4.5% 1.1% 3.3% -1.4% 2.5% 4.5% 5.8% 6.1% 5.1% 7.9% 5.4%

2011-12 6.2% 3.6% 3.5% -0.6% 2.7% 6.5% 5.6% 8.2% 7.0% 11.7% 6.0%

9M 2012-13 5.0% 1.7% 3.2% 0.1% 1.2% 4.7% 7.7% 6.7% 4.9% 9.4% 6.9%

Table 4: GDP & its components (y-o-y growth, constant 2004-05 prices) Q3FY12 Q4FY12 5.8% 5.2% GDP at market prices 9.2% 9.7% PFCE 8.1% 7.6% GFCE 10.2% 13.4% Exports 24.0% 24.3% less Imports -3.7% 3.6% Gross Domestic Capital Formation -1.7% 2.6% GFCF -32.0% -32.4% Change in Stocks 8.4% 15.9% Valuables -92.0% 127.1% Discrepancies Source: CSO; ICRA Analysis

Q1FY13 3.8% 2.0% 8.3% 7.2% 3.9% -5.0% -4.6% 51.1% -57.6% -116.1%

Q2FY13 2.7% 2.0% 8.0% 5.2% 13.8% 1.8% -1.0% 51.6% -6.5% -162.1%

Q3FY13 4.1% 4.6% 1.9% -2.1% -0.3% 7.4% 6.0% 48.8% -13.4% 283.9%

2011-12 6.3% 8.0% 8.6% 15.3% 21.5% 1.5% 4.4% -30.6% 6.6% -100.3%

9M 2012-13 3.6% 2.9% 5.7% 3.3% 5.6% 1.4% 0.1% 50.5% -28.1% -97.8%

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ANNEXURE B: Chart 11: Growth in GDP at factor cost (constant 2004-05 prices) 12%

Chart 12: Growth in Agriculture & Allied Activities (constant 2004-05 prices) 9% 8%

10% 7% 8%

6% 5%

6%

4% 4%

3% 2%

2%

1% 0%

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2012-13 AE 9M

Source: CSO; ICRA Analysis Chart 13: Growth in Industry (constant 2004-05 prices) 14%

0% 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2012-13 AE 9M

Source: CSO; ICRA Analysis Chart 14: Growth in Services (constant 2004-05 prices) 12%

12%

10%

10%

8% 8% 6%

6% 4% 4% 2%

2%

0%

0% 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2012-13 AE 9M

Source: CSO; ICRA Analysis

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2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2012-13 AE 9M

Source: CSO; ICRA Analysis

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Chart 15: Growth in GDP at market prices (constant 2004-05 prices) 12%

Chart 16: Growth in PFCE (constant 2004-05 prices) 10% 9%

10%

8% 7%

8%

6% 6%

5% 4%

4%

3%

2%

2%

1% 0%

0%

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2012-13 AE 9M

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2012-13 AE 9M

Source: CSO; ICRA Analysis

Chart 17: Growth in GFCE (constant 2004-05 prices)

Source: CSO; ICRA Analysis

Chart 18: Growth in GFCF (constant 2004-05 prices) 18%

16%

16%

14%

14%

12%

12% 10%

10%

8%

8%

6%

6%

4%

4% 2%

2%

0% 0% 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2012-13 AE 9M

Source: CSO; ICRA Analysis

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2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2012-13 AE 9M

Source: CSO; ICRA Analysis

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