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Deciphering India’s Q2 GDP & Future Outlook

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CONTENTS Deciphering Q2 GDP data Indian GDP growth Sector-wise performance Trigger for Indian Equity Market Future Outlook

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Deciphering Q2 GDP data The economy grew at its fastest pace in ten months, clocking a growth of 8.9 per cent in the second quarter ended September. The numbers bettered industry and government expectations that GDP growth would run out of steam in the period. Growth was buoyed by a healthy increase in service sector and farm output. The gross domestic product (GDP) at factor cost (constant prices) expanded at a higher-than-expected rate of 8.9% in the second quarter of fiscal year 2010-11 (Q2FY11) in year-on-year (y-o-y)

GDP Q2 FY11

terms, relative to the 8.7% growth in the same quarter in the previous fiscal year (Q2FY10). The pace of GDP growth recorded in Q2FY11

9.8 8.9

9.8 8.8 8

was similar to the growth witnessed in the preceding quarter (Q1FY11), which has been revised upwards to 8.9%. While the overall economic

4.4

growth momentum remained steady in the sequential quarters, buoyed by higher growth of the agriculture and

services

growth

sectors,

decelerated

in

industrial Q2FY11

relative to Q1FY11, led partly by the waning of the favorable base effect.

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Indian GDP Growth Quarters

GDP Growth

Q2 2010-11

8.90 %

Q1 2010-11

8.88 %

Q4 2009-10

8.60 %

Q3 2009-10

6.00 %

Q2 2009-10

8.68 %

Q1 2009-10

6.33 %

2009-10

7.40 %

Sector-wise Performance (y/y) Quarters

Sectors

Growth %

Q2 2010-11

Farm Sector

4.4% Vs 0.9% (YoY)

Q2 2010-11

Manufacturing

9.8% Vs 8.4% (YoY)

Q2 2010-11

Construction

8.8% Vs 8.3% (YoY)

Q2 2010-11

Mining Sector

8% Vs 10.1% (YoY)

Q2 2010-11

Services Sector

9.8% Vs 10.5% (YoY)

GDP growth was led by a robust 9.8% expansion of the services sector and an 8.9% growth of the industrial sector in Q2FY11. The growth of the services sector was driven by trade, hotels, transport & communication, which expanded by 12.1% in Q2FY11 – higher than the healthy 10.9% growth recorded in Q1FY11.

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While the pace of growth of community, social & personal services declined to 7.3% in Q2FY11 from 7.9% in Q1FY11, this was partly led by the base effect, with a high 14% growth in Q2FY10. Industrial growth was led by the healthy 9.8% growth of manufacturing. Notably, all the industrial sub-sectors, namely, mining & quarrying, manufacturing, construction and electricity, gas & water supply displayed a slower growth in Q2FY11 relative to Q1FY11. This partly reflects the base effect; the pace of growth of the subsectors aside from construction had improved considerably in Q2FY10 relative to the preceding quarter. Agriculture and allied sectors expanded by 4.4% in Q2FY11, as compared to the low 0.9% growth recorded in Q2FY10, aided by the healthy southwest monsoon rainfall received in 2010.

Trigger for Indian Equity Market As we said in our earlier weekly report dated 29th Nov. The second quarter GDP (gross domestic product) number has come in at a strong 8.9 per cent, which is the highest in the past 2 years acted as the trigger for the falling Indian equity market. Early during this quarter, Investors lost confidence due to slew of disappointing Q2 numbers and IIP data which slipped down to 4.4%. This was one of the most important reasons for liquidation of portfolios by FII’s though DII’s acted as net buyers and came in for bargain hunting. Below table shows the overall net value of FII’s and DII’s in three week.

Category

Period

FII

Buy Value

Sell Value

Net Value

2063.05

4452.79

-2389.74

3939.81

533.36

3406.45

13/12/2010 - 29/12/2010 DII

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Nifty which shredded almost 584 points in the previous three week has made a reversal in its trend and has gained almost 203 points this week to end near crucial level of 6k post Q2 GDP numbers. On the other hand, Sensex has recovered almost 736 points to near its psychological level of 20k. The market sentiments have improved after the robust GDP data after initial sluggishness. Investors seem to have recognized that the fundamentals of the Indian economy continue to be strong despite the global weakness.

Future outlook The government’s mid-term economic review report predicted that the country’s gross domestic product (GDP) is likely to grow by over 9.5% in 2010-11, buoyed by a strong rebound in the farm sector and a robust services sector growth. All indicators therefore portend well for output growth crossing 9 % for the entire fiscal year 2010-11, although some risks remain in the global economy which widens the band of expected growth outcomes around a revised projection of 8.75%. India’s GDP has grown by 8.9% during the first six months of 2010-11 making it the second-fastest growing economy behind China’s expected 9% growth for the full fiscal year. Despite a sluggish industrial output growth in August and September, there are signs of rising domestic demand in India. Consumer durables sales have grown at robust pace mirroring growing demand for goods such as televisions, refrigerators and cars. This growth is also broadly based, with recovery in all three sectors, agriculture, industry and services and in private consumption and investment. Indian economy may achieve the projected growth in coming quarters of FY11 and can make it to double digit as abundant rainfall is boosting the agriculture sector while inflation is falling. Food price inflation has dropped to single digit, lowest in 18 months, and is headed further down due tightening measures by Indian government. Another major support for the economy is recovery owing to expansionary fiscal and monetary policy complimented by fiscal deficit targeted at 5.5%.

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