India Insight:GDP growth estimated at 7.6%in FY16;dichotomy with the on-ground reality

CSO’s advance estimates peg GDP growth (at market price) at 7.6%YoYfor the full year FY16: This is above our expectation of 7.4%YoY andcompares with 7.2%YoY (revised downwards from 7.3% estimated earlier)and 6.6%YoY (revised downwards from 6.9% estimated earlier) GDP growthregistered in the previous two years. On a gross value added (GVA) basis,growth is estimated at 7.3% in FY16 (vs. 7.1% in FY15), which is in line with ourexpectations. The Ministry of Statistics also released the quarterly estimates.

Accordingly, the Indian economy registered GDP growth (at market prices) of7.3% in the Dec-15 quarter. This compares to 7.7% and 7.6% registered in theprevious two quarters. (See detailed discussion on the next page)FY17 growth outlook – hinges on capex, reform deliveryand supportive global economy

GDP growth – don’t take it at face value: While the Indian economy hasstabilised and there are green shoots emerging in certain pockets especiallyon the public capex front and urban consumption, we continue to believethat actual/experienced growth is only ~6% looking at the on-the-groundreality and real activity indicators (auto sales, credit off-take, exports,railway freight, stalled investments etc) vs. the reported GDP growth of7.6%YoY (CSO advance estimates) in FY16. While a part of this dichotomybetween reported and experienced growth could be attributed to a revisedbase year, improvement in the survey techniques, services deflator beingunderestimated, etc, there is a still a grey area, in our view, that makes itdifficult to justify this high growth of 7.5% plus.

FY17 growth outlook- bumpy ride to recovery: That said, we believe amodest cyclical recovery in growth will be visible in FY17. However, growthrecovery will continue to be sluggish and uneven, improving by ~10bps to7.5%YoY in FY17 as per the new GDP series. Based on the old GDP series,we would expect growth to recover to 6.3% in FY17 from 6% estimated inFY16. We expect growth in FY17 to be largely supported by higherconsumption demand, especially in urban areas. This, together with continuedpolicy effort to boost public capex, attract higher FDI flows and improve easeof doing business, will have a positive multiplier impact on growth. However,the slow pace of recovery in private corporate capex and weak exports willremain a drag on overall growth. We believe for sustainable economic revival,India needs (a) a meaningful pick-up in the investment cycle, led by theprivate corporate sector; (b) structural reforms including GST, bankruptcy law,PSU banks recapitalisation, and (b) a supportive global economy.

Upcoming FY17 union budget (Meeting the impossible trinity) – to haveimplications on growth dynamics: We believe more than the level of fiscaldeficit being targeted in the upcoming union budget (to be announced onFebruary 29th), it is the quality of spending that will be critical to watch for itsimpact on growth. We maintain our view that the government will retain itscommitment to boosting public capex in FY17. Considering the government isalready walking on a tight rope, it still needs to be seen whether it will relymore on asset sales, spectrum auctions, internal savings, structural reformsContd..