Economy: Pre-GST adjustments drag down growth - Kotak

Pre-GST adjustments drag down growth. Real GDP growth slowed to 5.7% in 1QFY18 and real GVA growth was at 5.6% led by sharp slowdown in industrial sector growth ahead of GST implementation even as growth in services sector picked up sharply. While we expect the growth to have bottomed out in 1QFY18 with a gradual recovery ahead, constraints in the form of low capacity utilization, private sector debt overhang, fiscal limitations and weak exports will keep the recovery muted. We retain our FY2018 GVA estimates at 6.8%, with a downward bias.

1QFY18 GDP growth slips to the lowest level since 1QFY15

Real GDP slowed to 5.7% in 1QFY18 compared to 6.1% in 4QFY17 and 7.9% in 1QFY17. Nominal GDP growth slowed to 9.3%, the first single-digit growth in six quarters. Meanwhile, the real GVA growth remained unchanged at 5.6% (Kotak: 6%) from the previous quarter but much lower than 7.6% in 1QFY17.

Pre-GST distortions drag down growth after the demonetization phase

The slowdown in 1QFY18 was largely led by high destocking in the run-up to GST, thereby dragging industrial growth to 1.6% from 3.1% in 4QFY17 and 7.4% in 1QFY17. CSO's press conference noted that (1) inventory destocking and (2) rise in price of intermediate goods contributed to the slowdown in corporate GVA. Agricultural growth was dragged down by weaker animal husbandry sector's growth despite record high crop production. Also, despite the central government's front-loaded expenditure, growth in 'public administration, defense, etc.' remained tepid. 'Trade, hotels, transport, communication and broadcasting' sector grew firm at 11.1%. 'Financial and real estate sector' growth also picked up to 6.4% though we are slightly surprised given the continued weakness in real estate sector as well as distortions due to implementation of RERA in certain key markets.

Across-the-board slowdown on expenditure-side growth

Private consumption grew 6.7%, the slowest pace in six quarters. Government consumption growth also slowed down to 17.2% compared to 31.9% in 4QFY17 (also validated in sectoral data). Expectedly, net exports were also a drag on growth given the sharp slowdown in exports and surge in imports in 1QFY18. Meanwhile, gross fixed capital formation (GFCF) grew marginally by 1.6% from (-)2% in 4QFY17, increasing the GFCF/GDP ratio to 29.8% compared to 28.5% in 4QFY17. Nonetheless, private investment remains muted given the six-year average GFCF/GDP stands at 32.2%. Valuables surged by 205%, mostly led by heavy gold imports in 1QFY18 (170% yoy at 317 tons). Notably, the inventory destocking, which dragged the manufacturing growth, is not meaningfully reflected in the change in stocks.

Muted growth in FY2018 with gradual recovery going forward

We believe growth has likely bottomed out in 1QFY18. We expect the economy to gradually show signs of recovery on the back of continued remonetization, expected restocking, easy financial conditions and improving rural demand from higher wages and good monsoons. But there are enough lingering factors which may keep overall FY2018 outlook sober: (1) possibly lower general government expenditure growth, (2) GST-led transient disruptions, (3) sluggish urban wage growth, (4) lack of private sector investment growth amid excess slack and overleveraged corporate balance sheet and (5) relatively weak external sector dynamics. We maintain our FY2018 real GVA growth estimate at 6.8% and maintain a watch on the extent of buoyancy across sectors in 2QFY18 for any downward revisions to our estimates.

Source : Equity Bulls

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