India’s Q1 GDP growth slips to 5.7%

Indian Economic Update

RBI in its annual report confirmed that INR 15.28 tn (~99%), out of INR 15.44 tn worth demonetiszed notes have returned into the system.


India: Q1 FY 2018 GDP remains weak on uncertainties

Q1 FY 2018 GDP growth disappointed by a large margin and came in at 5.7% YoY (GVA 5.6% YoY). The downside surprise was primarily on account of agriculture, manufacturing and government spending. On the other hand, trade, hotels and financial services surprised significantly on the upside.


GST related weakness in industry; government spending slows

  • Manufacturing grew by a meagre 1.2% YoY presumably affected significantly by inventory de stocking ahead of the implementation of GST in July.
  • IIP growth for the quarter and corporate earnings were also much muted for this quarter which weighed on the print. We expect this trend to reverse in Q2 when restocking is expected to happen.
  • We are surprised by the lower than expected print on agriculture in light of the strong Rabi crop.
  • The sharply lower than expected government spending print was unexpected given that Q1 has seen accelerated spending by the Government as the budget was preponed this year.
  • This component has supported growth strongly in the last fiscal and in the face of worsening fiscal situation continued support from the government may not be forthcoming in the coming quarters.
  • One encouraging development was the fact that non-agri non-govt GVA growth improved to 5.5% YoY from 3.8% YoY in the previous quarter. Most of this uptick was attributable to services, within which trade, hotels witnessed a sharp rebound in Q1 as compared to the previous quarter.


Consumption slows, investment remains tepid

  • One worrying aspect of the print on the expenditure side is the fact that private consumption demand is continuously slowing for the past couple of quarters. This also seems to suggest that some form of demand destruction is underway in the economy.
  • Investment demand remains muted and gross fixed capital formation showed a slight uptick to 1.6% YoY from -2.1% YoY in Q4 FY 2017. Given the continuing concerns about the twin balance sheet stress in the economy, we do not believe that a private capex revival will happen very soon. This is also borne out by low capacity utiliszation data, muted earnings growth, low investment announcements etc.
  • The slowdown in consumption and investment growth indicates that a substantial negative output gap still exists in the economy. This is also showing up in the recent fall we have witnessed in core inflation, which is a proxy for aggregate demand in the economy.
  • For the year as a whole, we believe that the chances of upside risks from a demand pull core inflation pick up seems fairly low.


In conclusion, the Q1 GDP print has been a victim of GST related uncertainties and generally low aggregate demand in the economy. We expect some rebound in the coming quarters. As compared to last fiscal, agriculture and government spending may not support as much. We believe there could be some downward bias to our growth projections for this year. On the monetary policy front, more action would remain data dependent, but we expect the RBI to revise their growth projections lower. If inflation should strongly undershoot expectations, some more space for accommodation may open up over the course of this fiscal.


Global Update

The annual Jackson Hole economic symposium was  convened over last weekend.

  • ECB President, Mr. Mario Draghi reaffirmed the need for caution before the European Central Bank can remove monetary stimulus. He has stressed on the fact that inflation still has “way to go” before it reaches the bank’s target. He has emphasiszed on the need to be patient, as a very high degree of monetary accommodation is still warranted.
  • Fed chair, Ms. Janet Yellen’s speech was largely devoid of any cues on monetary policy, focusing on regulatory aspects.


Other key developments:

  • North Korea fired an unidentified ballistic missile over Japan on Tuesday. Japan’s Prime Minister, Mr. Shinzo Abe has termed the missile passing over Japan as “unprecedented, grave and serious threat”. The launch also led to South Korea retaliating with an aggressive show of force by conducting a live-fire drill on its eastern coast.
  • The United Nations condemned North Korea’s “outrageous” firing of ballistic missile over Japan, even though it held back on imposing new sanctions on the nation. Fifteen-member security council said that it was of “vital importance” that the country took immediate, concrete actions to reduce tensions. It called all states to implement UN sanctions against North Korea.



Indian equities started the week higher. India and China's agreement on "expeditious disengagement" of border personnel at Doklam aided the sentiment.
Meanwhile, equity markets reeled under weak global cues caused by a missile launch by North Korea. In early trade, the markets had started trading on a negative note. However, FM Mr. Arun Jaitley’s comments on smooth rollout of GST and its contribution to overall tax buoyancy was received positively by markets.


During the week Sensex gained 0.94% to close at 31892.23 while Nifty advanced 1.18% to close at 9974.40.



Indian Government bonds started week sharply lower as traders offloaded stock ahead of INR 100 bn OMO sale. Given that hopes of further reductions in interest rates in the medium term are low, bond prices are expected to fall from the prevailing levels in the medium term.

Gilts gained as a result of sharp fall in US Treasury yields in Asian trade prompted traders to add to their holdings. Markets traded cautiously in a narrow range as traders remained on the sidelines ahead of the GDP/ GVA figures.


The 10Y benchmark yield ended at 6.48% as against previous week’s close of 6.54%.



Oil displayed a mixed trend during beginning of the week as Hurricane Harvey struck Houston. The tropical storm created a wedge between the two crude benchmarks and further spiked the crack spread – difference between prices of crude and its final products, as gasoline prices hit two year highs. The Houston region saw unprecedented levels of rainfall and flooding, crippling the US energy industry by knocking almost 15% of the refining capacity. As oil refineries remain shut and cut back their production, crude demand remains strained. Amidst this, pipeline blockades in Libya which slashed output by nearly 400,000 barrels per day offered some support to Brent. Crude prices were weighed down subsequently as the Tropical Storm Harvey drifted into the Gulf of Mexico creating disruptions in heart of US oil-and-gas industry.
The havoc created by hurricane Harvey contributes to disrupt refineries, reducing demand for crude. The positive activity figures from China and US continue to present encouraging prospects for medium term oil demand.



Gold extended its rally, the yellow metal was buoyed by a falling dollar. Further supporting gold was geopolitical uncertainty sparked by U.S. President, Mr.  Donald Trump’s renewed threat to scrap the North American Free Trade Agreement.

The yellow metal embraced fresh highs seen this year after it shot past its resistance of USD 1300 following North Korea launching 3 short missiles into the Sea of Japan. Meanwhile, strengthening in the dollar index limited the upside.



Indian Rupee started this week stronger as some of the foreign banks sold dollars on the back of weakness in the greenback post Yellen’s speech at Jackson Hole meet. News of Chinese troops' withdrawal from Doklam aided the rupee.
However, Indian Rupee came under pressure as some banks bought dollars before expiry of August currency futures and RBI daily fixing rate.
Dollar sales by foreign banks and exporters aided the rupee. Further, lack of any significant purchases of dollars also supported the domestic currency. However, the mild strengthening in the dollar index capped gains.


Source: ICICI Bank Research, Bloomberg and CRISIL.