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India grows 7.4% this year, 8%+ growth achievable
June 4, 2010

India GDP Update

Author : Manjunath Gaddi

Untitled Document

Key Points

  • The Indian economy grew at 7.4% in FY 2009-10
  • Government expects the economy to grow by 8.5% in FY 2010-11
  • Government expects the inflation to drop to 5%-6% by December 2010
  • Fiscal deficit can reduce to 5% instead of the target of 5.5% for FY 2010-11 on account of higher inflows from the auction of 3G spectrum and the Broadband Wireless Access (BWA) spectrum
  • Monsoon rains expected at 98% of the long-term average, which is good news for the agricultural sector and the rural economy
  • We expect RBI to hike policy rates in July in case of fuel price hike

The improved GDP growth numbers for the second and third quarter have helped India to grow at 7.4% in FY 2009-10 rather than 7.2% as earlier predicted by the Government. The GDP growth for second quarter was revised upwards from 7.9% to 8.6% and the third quarter GDP growth was revised upwards from 6.0% to 6.5%. At current prices, the GDP is at Rs. 58, 68,331 Crores or roughly about US$ 1.25 trillion.  The equity markets cheered the news as Sensex closed 81 points higher on 31 May 2010.

As seen from table 1, all the eight sectors that make up the economy have seen positive growth. Agriculture, Banking & Financial services and Community services are the only three sectors where the growth has reduced over the previous year. Nonetheless, Agriculture sector has turned out to be the dark horse with the government earlier predicting that the sector may contract by 0.2%. The community services sector has shown a steep fall in growth rate to 5.6% in the revised estimates, as against the growth rate of 8.2% in the advance estimates. This has mainly occurred due to a greater than anticipated fall in total expenditure of the central government.

Due to the fiscal and monetary stimulus doled out in FY2008-09, there has been a huge spurt in the growth of Mining and Manufacturing sectors. However, the declining trend in the growth of Banking & Financial services is evident.
Table 1: Y-o-Y growth in the eight sectors that constitute the GDP
  FY2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10
GDP -  Total 9.5% 9.7% 9.2% 6.7% 7.4%
Agriculture, Forestry and Fishing 5.2% 3.7% 4.7% 1.6% 0.2%
Mining and Quarrying 1.3% 8.7% 3.9% 1.6% 10.6%
Manufacturing 9.6% 14.9% 10.3% 3.2% 10.8%
Electricity, Gas and Water supply 6.6% 10.0% 8.5% 3.9% 6.5%
Construction 12.4% 10.6% 10.0% 5.9% 6.5%
Trade, Hotels,  Transport and Communication 12.1% 11.7% 10.7% 7.6% 9.3%
Financing, Insurance, Real estate & Business services 12.8% 14.5% 13.2% 10.1% 9.7%
Community, Social & Personal services 7.6% 2.6% 6.7% 13.9% 5.6%
Source: Bloomberg and iFAST compilations

Chart 2 shows the contribution of the eight sectors to the GDP. Mining, Manufacturing, Electricity, Trade and Banking & Financial service sectors have increased their contribution to the total GDP. Agriculture, Construction and Community services have reduced their contribution to the total GDP.

Key concerns

Inflation has averaged at 9.75% in the first four months of 2010 and continues to be a major cause of concern and one of the causes for such high inflation was the insufficient rains last year. The agriculture sector’s contribution to the GDP reduced from 15.66% to 14.6% on account of lower monsoon. However, this year the meteorological department has predicted India will receive 98% of the long-term average during the monsoon season from June to September, which is good news as a good rainfall will lower the food inflation and the overall level of inflation. The Prime Minister expects the inflation to moderate to 5% - 6% by December 2010.

One of the major concerns that India faces is the level of fiscal deficit. It was estimated to be close to US$90 billion or about 6.6% of the FY 2009-10 GDP. The government, in its budget had aimed to reduce the fiscal deficit to 5.5% of the GDP for FY 2010-11. Disinvestment of public sector companies and inflows from the 3G auctions were to be the primary sources for funds that would end up reducing deficit. The government was expecting collections of Rs. 35,000 crores or about US$7.5 billion. However with the unexpected bumper inflows from 3G auctions of over 67,718 crore or about US$15 billion and inflows from the broadband wireless access (BWA) (which is expected to touch US$7.5 billion) have revised deficit estimates to drop to 5%.
Chart 2: Percentage contribution of the eight sectors to the GDP

 Impact on debt markets

Government is scheduled to borrow Rs 4.57 trillion in the current fiscal as against Rs 4.51 trillion in the last financial year. Nearly Rs 2.8 trillion of the borrowing is scheduled to be conducted in the first half of the fiscal. However with the record inflows from the auctions, the borrowing is expected to be lower, which is good news for the bond markets. The yield on the benchmark 10 year government security has fallen by 54 basis points to 7.5%. This fall in yield of the 10 year security  is primarily due to the change in the 10 year benchmark bond from 6.35% GS 2020 to 7.80% GS 2020.

Considering that liquidity will be tight in the month of June, on account of outflows from the recently concluded 3G Auctions and advance tax outflows, it is unlikely that RBI may tinker with rates before the monetary policy review scheduled at the end of July. However, any hike in fuel price may prompt the central bank to hike rates in its policy review on 27 July, to control inflation from spiking up again.

The government expects the economy to grow by 8.5% in FY 2010-11, we think the economy will grow at 8+% considering the crisis in Europe and delayed growth in the global economy. For India, the current crisis may be a blessing in disguise as lower crude prices will help to keep the level of inflation low and given the growth prospects, India might be able to attract more foreign funds.

Impact on equity markets

As at 31 May 2010, the Sensex has given negative 3% returns on Year-To-Date (YTD) basis.  As at 31 May 2010, consensus estimates of earnings growth for FY2010-11, FY2011-12 and FY2012-13 have been revised to 18.76%, 19.3% and 20.4% with 1 year, 2 year and 3 year forward PEs of 16.99X, 14.24X and 11.82X respectively which is lower than the 3 year average PE of 18.7X. With the robust growth in the economy, we expect the equities to deliver good returns in FY 2010-11.

iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.


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