India’s GDP release threw up three key messages. First, the 4Q GVA and GDP estimates were much weaker than expected. The chief statistician attributed it partly to base effects (4Q FY16 was revised up significantly) and higher WPI inflation (used to derive real estimates from nominal data). WPI inflation is likely to inch lower over the next quarter (by over 1ppt) and could lead to some improvement in GDP growth numbers.
Second, growth has been slowing since the middle of 2016, and that continued into the January to March 2017 quarter. Other coincident indicators have been giving a similar message. Cement production, capex goods production and core inflation have been moderating since mid-2016. Other indicators such as the construction IIP index and financial sector indicators joined the bandwagon in end 2016, weakening since the demonetisation episode.
Third, with the release of the new IIP and WPI series earlier this month, we expected upward revisions to growth for the last few years, if the underlying data remained unchanged. While a few sharp upward revisions did come through – for instance a 60 bps bump up in 4QFY16 and a 75bps bump up in 1QFY17 – overall revisions for the past two years were of a smaller quantum (15-25bps). It is likely that the underlying data on which growth is based was also revised during this period. These revisions tend to happen in 4Q every year, when more comprehensive data sources become available.
Our long held below-consensus view is that GDP growth will remain flat at 7.1% in FY18. Investment is still weak, urban wages are growing at multi-year lows, government spending may not remain as high given the fiscal consolidation path, and the rise in exports over the last few months are showing some signs of moderation. True, rural growth could come in high if rains are strong, but that would just about offset the weakness from other sectors.
This means that the output gap – which is one of the concerns for the RBI regarding higher inflation in 2HFY18 – is likely to remain negative for longer.
We expect the RBI to acknowledge in the upcoming 7 June policy meeting that current pressures on inflation are turning out to be lower than expected. We expect the RBI to keep rates on hold over the foreseeable future.
We were expecting much of the upward revision to take place in 1QFY17 because that is when the wedge between the new and old IIP and WPI numbers was the largest. This did occur as 1Q was bumped up by around 75 bps, while 2Q by only 15bps