GST adversely impacts the growth during Q1FY2018

Indian Economic Update

India has just witnessed a quarter of lacklustre growth in Q1 – FY 2018, with drags imposed by several components such as manufacturing, agriculture and government spending. However, pockets of improvement were seen in certain service-related sectors. Below we present a snapshot of various high-frequency sectoral economic indicators to show where the growth picture is heading.


Lead indicators for services sector:

  • While domestic passenger traffic and cargo traffic continue to remain subdued, railway freight traffic has remained broadly healthy on the back of improving cement and coal freight. However, the latter may be hit going ahead, as subsidiaries of Coal India are not being able to load the targeted quantities (~60% of freight revenue comes from coal).
  • While the sales of automobiles were adversely affected by demonetisation, most segments have posted a rebound in the run up to the festive season.


Industrial growth indicators:

  • The Index of Industrial Production (IIP) has remained in a slowing mode since March 2017, with across-the-board loss in momentum related to uncertainties surrounding GST. Once restocking starts gaining ground we should see some improvement in IIP.
  • In contrast, the overall growth of eight core infrastructure industries has improved in July. This was driven by a steady uptick in steel and electricity segments, aided by base effects. However, the ~2.4% YoY growth seen in April-July 2017 is modest as compared to the ~6.0% YoY growth seen in April-July 2016.
  • The PMI for manufacturing and services sectors recovered swiftly in the initial months of 2017 after demonetisation, before the rollout of GST plagued sentiments again.
  • After tanking to a 101-month low 47.9 in July (month of GST rollout, when manufacturers postponed plans of production and purchase), manufacturing PMI rebounded to expansionary territory on the back of healthy new orders, production and employment.
  • Services PMI has been more severely hit by the teething problems associated with GST, which may be due to the fact that this sector has a substantial number of small and unorganised players, who are finding the transition to the new tax regime more tedious. Services PMI is still in the contractionary zone for the second successive month, but the outlook remains positive as more formalisation permeates.


Banking system indicators:

  • While deposit growth has moderated post the surge seen after demonetisation, credit growth is still very tepid. Credit growth has seen a CAGR of ~9% over FY 2014-2017, which has been primarily driven by credit to agriculture and allied activities (CAGR of ~16%). Credit growth to industry has been minimal given twin balance-sheet stresses in banks and corporates.


External sector indicators:

  • Exports growth has taken a turn for the worse harangued by a strong domestic currency. Non-oil non-gold imports have also moderated over the past few months, indicative of a demand slowdown in the broader economy. On the plus side, the RBI has built substantial forex reserves to provide 11 months of import cover.

In conclusion, GST seems to have adversely affected growth in most sectors of the economy before and since its rollout in July 2017. However, this was expected, as these are largely teething issues, which will gradually smoothen over the course of this fiscal, and bring growth indicators back on track by Q4 – FY 2018 at the latest.


Other important developments during the week:

  • India’s manufacturing PMI rebounded to 51.2 in August, posting a significant improvement from July’s print of 47.9.
  • Due to the teething effects of the Goods and Services Tax (GST), the services PMI stayed in contractionary territory, albeit improving slightly to 47.5 in August from 45.9 in July.


Global Update

US: Weaker job additions and stagnant wage growth in August

  • US Non-Farm Payrolls (NFP) added 156K jobs in August which is lower than market expectation of 180K and also July data revised to 189K from 209K.
  • Unemployment rate increased to 4.4% in August from a 16-year low 4.3% in May while wage growth remained stagnant at 2.5% YoY for the fifth consecutive month.
  • Hurricane Harvey had no effect on the employment data for August.


Fed rate hike will be data dependent

  • Even though the employment change is less than expected, the Fed’s decision to hike rates further in this year may not be affected considering the job addition has been weaker in August historically due to seasonality. We expect that Fed will announce balance sheet trimming plans in the September meeting. Markets continued to place less probability over Fed rate hike and the recent comments from Fed members indicate that the further rate hike will depend on the inflation data prints in the coming months.
    North Korea on last Sunday (September 2, 2017) conducted its sixth and the most powerful nuclear test, which it claimed to be an advanced hydrogen bomb. US President, Mr. Trump said that his administration is now contemplating stopping trade with any country that has trade ties with North Korea. He has also warned North Korea of a “massive military response” if US or any of its allies are threatened.
    US ambassador to the UN warned on Monday that North Korea was “begging for war” and said the two decades of “half measures” by the UN had failed. She asked the UN to respond to North Korea’s latest nuclear test with the “strongest sanctions” ever imposed on Pyongyang to “resolve this problem through diplomacy”.


ECB policy review: ECB keeps rates unchanged

  • European Central Bank (ECB) maintained the accommodative stance and left policy rate unchanged.
  • The Central bank upgraded its 2017 growth forecasts while lowering the inflation forecasts for 2018 and 2019.
  • Details about future of the QE Program are expected to be released in October meeting.
  • We maintain bullish bias on Euro, expecting it to trade towards 1.24 against US Dollar by year-end.



Indian equities started week lower amidst a broad based global risk off sentiment following North Korea’s missile tests. Reports of North Korea contemplating a possible ICBM launch in the near future also weighed on global equity markets. The increase in investor anxiety was witnessed through a 20% rise in India VIX, its highest intra-day gain in more than 11 months. Markets do not expect the current developments to lead to a significant correction as the system wide liquidity continues to remain in surplus.
Risk aversion continued to engulf financial markets given the lack of consensus among the US, Russia and China on how to put pressure on North Korea to abandon nuclear tests.


During the week Sensex lost 0.64% to close at 31687.52 while Nifty declined 0.40% to close at 9934.80.




Indian government bonds started week marginally lower. RBI’s announcement of an INR 100 bn OMO sale on Friday weighed on the market sentiment. The demand for the gilts remained subdued as prices are unlikely to rise in the near future. Further, traders refrained from taking any fresh positions ahead of next week’s inflation data print and the RBI’s scheduled OMO sale.


The 10Y benchmark yield ended at 6.55% as against previous week’s close of 6.48%.



Oil started this week lower. Benchmark US gasoline prices fell by more than 4% as oil refineries slowly resumed activity after Hurricane Harvey subsided, easing concerns over supply shortages. Recent developments in North Korea put downward pressure on crude as traders moved money out of oil.
Meanwhile, Crude prices moved upwards amid fears of disruption to the US oil production from Hurricane Irma, along with the renewed demand for crude, as refineries resumed operations after the Harvey aftermath. On the other side of the globe, Brent responded positively to suggestions by the Russian energy minister, Mr. Alexander Novak, that Russia and Saudi Arabia would be open to extending their output cut agreement.
Oil conflicted towards the end of the week as Hurricane Irma created havoc. The wedge between the two benchmarks widened to more than USD 5/ bbl with Brent rallying for the third consecutive session and WTI stalling, as storm Irma hits the US.



The yellow metal started week on a positive note as it breached an almost 12 months high on the back of risk-off sentiment. A weaker dollar due to the subdued US nonfarm payroll data from Friday also offers a robust environment for gold.

Of late, the gold market has been upbeat following escalations in geopolitical tension. However, the recent qualms in Washington, together with a weaker dollar, may account for most of the USD 100/ Oz rally seen in gold this year.



Indian Rupee started this week weaker. Escalating tensions in Korean peninsula continue to weigh on risky emerging market currencies. However, dollar sales by Public Sector Banks and exporters capped the depreciation in rupee. Persistent dollar sales by foreign banks aided the rupee. However, escalating geopolitical tensions continue to weigh on risky emerging market currencies.
INR gained marginally towards the end of the week. Significant quantum of dollar sales by public sector banks aided the rupee. Sharp weakness in the dollar index also supported emerging market currencies.


Source: ICICI Bank Research, Bloomberg and CRISIL.