Indian GDP review

First look on GDP

GDP growth rose to 7.3% in FY15, revised down from the advance estimate of 7.4%. As expected, agriculture growth weakened to 0.2% while the non-agriculture sector rose to 8.6%. Quarterly trends show that GDP growth picked up to 7.5% in Q4, however gross value added declined (GVA at basic prices) declined to 6.1% - in line with muted high frequency data between January – March 2015. This signals that most of the uptick came from growth in net product taxes. The gap between nominal and real GDP growth also fell with persistence of disinflationary trend.

Looking ahead, we believe that falling inflation (due to lower food and fuel inflation) and improving income visibility (especially farm incomes if monsoon is normal) will remain supportive of growth in FY16. We expect GDP growth to rise to 7.9% with consumption growth at 7.0%. In the absence of any significant monetary or fiscal stimulus, the consumption revival will be mild and critically hinge on how monsoons play out in 2015. The rise in service tax to 14% from 12.36% effective June 1 will be a mild dampener for service categories like hotels and restaurants, movies, phone bills etc. But this does not change our growth outlook as this was already known when the budget was announced in February and was factored in our assessment of fiscal 2016. This, we believe, will improve capacity utilisation rates and lead to revival of private investments over the next 12-18 months. 

Also, as the expected pick-up in in consumption is fragile and investment revival not in sight this year, the case for further monetary easing becomes stronger. With inflation under control, we expect RBI to reduce rates by 25-50 bps in the current fiscal. The likelihood that RBI could wait for IMD’s second monsoon forecast in June before cutting rates cannot be ruled out.