Growth broad-based, expect FY11 GDP growth of 9%



India's 2QFY11 GDP growth at 8.9% (MOSL 9%, Consensus 8.2%) signifies (1) economy operating close to potential, and (2) resounding validation of the India growth story. While agriculture and services expectedly turned up, industry also performed well. Most importantly private consumption is back and the government is only gradually withdrawing its fiscal support. We expect GDP to grow at ~9% in FY11 and well into FY12.



Cyclical upturn drives GDP growth to ~9%, as expected

- 2QFY11 GDP growth was 8.9% (MOSL 9%, consensus 8.2%), which was in line with expectations.

- Simultaneously 1QFY11 GDP was revised to 8.9% from 8.8%. Thus 1HFY11 growth was a healthy 8.9%.

- The cyclical upturn has taken GDP close to the potential 9% and seems to have stabilized at that level.



All sectors and components of GDP do well

- Notably all three sectors of the GDP performed well.

- Agriculture (4.4%) turned up due to bumper Kharif harvest on the back of a good monsoon.

- Notwithstanding the sharp fluctuations in monthly IIP figures, industry posted a healthy 8.9% growth. This was driven by IIP growth of 15% in July, but it subsequently decelerated.

- Service sector grew by 9.8%, remaining close to double-digit level. The sub-group of trade, hotels, transport and communication, which constitutes nearly equivalent weight in the overall GDP as that of the industrial sector (including construction), registered 12.1% growth, perhaps receiving a boost from the Commonwealth Games. This is the only notable sub-sector that bucked the seasonal 2QFY11 downturn by a wide margin, pulling up overall GDP.

- The expenditure side of GDP revealed a noticeable turnaround for private consumption expenditure, even on a QoQ basis, which augurs well for future growth.

- The government has continued to support the economy, indicating it will spend the excess amount received from one-time 3G/BWA revenue and collections due to higher tax buoyancy.

- Investments slowed down, perhaps due to the monsoons delaying a few construction and project-related activities.



Expected growth close to 9% despite near-term setbacks

- We have revised our FY11 growth projections to 9% from 9.1%, led by a recent slowdown in IIP, which we hold is not yet conclusive due to data issues related to the indicator.

- Buoyancy in the agriculture and services sectors will continue, as indicated by the outlook for the Rabi crop and most lead indicators of service sector.

- The recent spate of governance issues (that have yet to significantly dent actual projects on ground) could dampen sentiment in the near term. However, the sheer volume of ongoing projects (~US$2.6t) could keep the investment story going for a long time. Some setback in the mining and electricity sectors notwithstanding, the industrial sector can still pull off high single-digit growth due to the revival of exports.

- A turnaround of private final consumption indicates the durables and FMCG sectors will do well. Moderation in inflation would help these industries to grow.

- Supplementary demands put up by the government to Parliament in two phases demonstrate that the government will not withdraw its fiscal support though it will contain it to pre-announced levels. This augurs well for consumption demand, as there has been a bulge in welfare payments, and for attracting private investment in the PPP format.