India: GDP growth slower than expected due to agriculture

India: GDP growth slower than expected due to agriculture
● GDP grew by a slower-than-expected 5.3% y-o-y in Q4 2008, down sharply from 7.6% in Q3, led by a surprising contraction in agriculture output. Industrial output growth moderated, while that of services rebounded.
●
On the demand side, strong government spending and inventory accumulation were offset by decelerations in the growth rates of private consumption and investment.
● We are trimming our GDP forecast for FY09 (year ending March 2009) to 6.4% from 6.8% and expect growth to slow further to 5.3% in FY10. We expect a 50bp rate cut any time between now and the end of March.
India’s real GDP grew 5.3% y-o-y in Q4 2008, slower than expected (Consensus: 6.1%; Nomura: 6.2%) and down sharply from 7.6% in Q3 (Exhibit 1). The negative surprise was entirely due to a contraction in agriculture output, by -2.2% y-o-y in Q4 versus our expectation of +2.0% (agriculture has a 20% weight in GDP). According to the agriculture ministry, food grain output is estimated to contract by 1.3% in FY09 due to sharp declines in coarse cereals, pulses and commercial crops output. A high base effect (agriculture output rose 6.9% y-o-y in Q4 2007) also contributed to the sharp year-on-year fall in Q4. Meanwhile, industrial output growth slowed markedly to 2.4% y-o-y in Q4 from 6.1% in Q3, led by weakness in the manufacturing (-0.2% y-o-y) and construction (6.7%) sectors. Bucking the trend, service sector output growth rose to 9.9% y-o-y in Q4 from 9.6% in Q3, led by robust 17.3% y-o-y growth in community services (a proxy for government services) and surprising resilience in the financing and real estate sector (+9.5%), while trade and communication output moderated to 6.8% from 10.7%.

The expenditure split did not throw up any major surprises (Exhibit 2). Government consumption growth rebounded to 24.6% y-o-y in Q4 from 7.9% in Q3, consistent with counter-cyclical fiscal expansion. Private consumption growth fell sharply to 5.4% y-o-y from 6.9% in Q3, reflecting the collective headwinds of negative wealth effects from falling asset prices, a weakening labour market and tighter bank lending standards. Fixed investment growth fell to 5.3% y-o-y from 15.1%. Inventories added 0.9 percentage points (pp) to GDP growth in Q4, reflecting unintended inventory accumulation because of the abrupt drop in shipments, while net exports dragged -2.8pp off GDP growth.
We are revising our GDP estimate for FY09 to 6.4% y-o-y from 6.8%, largely due to lower agriculture output. We expect GDP growth to slow to 5.0% y-o-y in Q1 2009 due to inventory destocking and for the economy to trough at 4.5% in Q2. We expect GDP growth to remain sluggish at 5.3% in FY10, as the slowdown in private consumption and investment demand continues to offset higher government spending. From the policy perspective, the onus is now squarely on monetary policy. The government has already announced large fiscal stimulus measures and no further fiscal announcements will be made once elections are announced. Moreover, we judge that monetary policy needs to be expansionary to accommodate the government’s increased borrowing; otherwise it risks crowding out private investments. Therefore, we continue to expect the Reserve Bank of India to cut both the repo and reverse repo rates by 50bp any time between now and the end of March, and by a further 100bp by mid-2009.


Exhibit 1. India’s real GDP

Exhibit 2.
India’s GDP growth by components


% y-o-y
Q1
Q2
Q3
Q4

2008
2008
2008
2008
Real GDP
8.4
7.9
7.6
5.3
Agriculture
2.5
3.0
2.7
-2.2
Industry
7.4
6.9
6.1
2.4
Services
10.8
10.0
9.6
9.9
By expenditure




Private consumption
11.7
7.7
6.9
5.4
Government
15.8
7.1
7.9
24.6
Fixed investment
10.6
10.1
15.1
5.3
Change in stock
-4.3
-32.0
-32.0
31.2
Exports
7.4
23.2
10.6
11.4
Imports
7.2
30.3
26.0
20.6
Source: Bloomberg, CEIC and Nomura estimates.

Source: Bloomberg, CEIC and Nomura.