Economy: Advance estimates underplay the cyclical recovery

Advance estimates underplay the cyclical recovery. A weaker-than-expected FY2018AE suggests only a modest improvement in 2HFY18. The uncertainty associated with GST collections continues to muddle estimates as well as policy decisions. We maintain FY2018 GVA estimate at 6.5% as (1) advance estimates are based on data until November and (2) lead indicators are signaling a nascent recovery.

CSO maintains a conservative tone

As per the CSO advance estimate, real GDP growth moderated sharply to 6.5% in FY2018 compared to 7.1% in FY2017. Real GVA growth for FY2018 is estimated at 6.1% compared to 6.6% in FY2017. With 1HFY18 GVA growth at 5.8%, the CSO's implied 2HFY18 growth is around 6.4%. Notably, CSO estimates are based on extrapolation of data available until November; the underlying trend of which has mostly been weak owing to GST implementation. Given that there has been a definite pickup in activity in 2HFY18, we expect components such as retail trade and manufacturing could see some upward revisions. Improvement in corporate earnings will lend further support. We continue to expect 2HFY18 GVA growth at 7.1% compared to 5.8% in 1HFY18. We would, however, monitor the high frequency data closely for any deviation from the recent uptrend. Also, we note significant divergence between the GDP and GVA estimates suggesting higher indirect tax collections when the monthly run rate of GST collections seems to be low.

Advance estimates to aid nominal GDP forecast for the Union Budget

The advance estimate of GDP is usually announced by the CSO one month ahead of the Union Budget so as to aid the government in evaluating the growth outlook. Typically, the CSO's advance estimates for nominal GDP are used as the base to compute the tax buoyancy and fiscal deficit in the Union Budget. We expect the government to assume a nominal GDP growth of 11.6% in FY2019 compared to the FY2018E of 10.6%. We note that the advance estimate for nominal GDP growth has been reported at 9.5%.

Gradual recovery underway

The high frequency data since September continues to point towards a cyclical bounce back in economic activity. We, thus, continue to retain our GVA estimate of FY2018 at 6.5%. The economy is further expected to recover, although gradually, to 7.1% in FY2019 as GST related disruptions smoothen and as consumption improves amid rising rural wages, lower GST tax incidence and expected payouts from State's implementation of 7CPC. Improvement in demand is likely to reduce the slack in the economy, thereby providing a boost to private sector investment towards the end of FY2019.

Source : Equity Bulls

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