Indian Economy Update

FY09 GDP comes in at 7.1%; FY10 estimate at 5.5%

Trends in GDP (%YoY)

12
High growth phases
10 9.5 9.7
9
8.5
7.8
8 7.3 7.3 7.5
7.1
6.5 6.6
5.9 6 5.8
6 5.3 5.5
5.1
4.8
4.4
3.8
4

2 1.3

0
FY91

FY93

FY95

FY97

FY99

FY01

FY03

FY05

FY07

FY09E

FY11E
™ FY09 GDP slightly higher than expectations — The government’s advanced GDP estimates for FY09
peg growth at 7.1%,higher than ours and consensus estimates of 6.8%.Growth was led by agriculture up
2.6%, industry (including construction) at 4.8%, while services surprised on the upside coming at a
robust 9.6%. Looking at GDP by demand, in line with expectations investment growth slowed to single
digits for the first time in six years. Consumption growth remained buoyant at 8.2% with the
deceleration in the private sector at 6.8% being offset by the pay revision which gets accounted under
public consumption up 16.8%.

™ Will these estimates be revised? Yes but not by much — Given that 1HFY09 GDP was 7.8%, the full-
year FY09 GDP number indicates that growth during Oct08-March09 was 6.4%. This does appear a bit
optimistic given that industrial production, exports, tax collections have seen a sharp deceleration and in
some cases a contraction. (The CSO releases four sets of GDP data each year- Advance, Updated
Advance, Quick and Revised estimates. The Advance estimates are released in February – two months
before close of the year for the current FY. These estimates will be revised in June and finally next year.)

™ FY10 GDP estimate of 5.5%; tailwinds to help in FY11 — Despite a higher-than-expected number in
FY09, analysts maintain the FY10 GDP estimate of 5.5%. This factors a contraction in exports, a further
deceleration in investment growth and a moderation in consumption. While much has been debated on
the impact of the global headwinds on growth, its worth keeping in mind the growing impact of the
tailwinds in play. These include the coordinated response to the crisis including monetary and fiscal
stimulus as well as a collapse in commodity prices. Both these factors should help enable FY11 growth
rising to 6.6%

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Key Highlights

Trends in GDP by Activity (%YoY)

Trends in GDP by Activity (%YoY)

Weights* FY06 FY07 FY08 FY09 FY10E FY11E
Agriculture 17.8 5.8 4.0 4.9 2.6 3.0 3.0
Industry 26.5 10.2 11.0 8.1 4.8 3.6 5.8
Manufacturing 15.2 9.1 11.8 8.2 4.1 3.5 5.0
Mining & quarrying 2.0 4.9 8.8 3.3 4.7 3.0 5.0
Elect. Gas, water supply 2.0 5.1 5.3 5.3 4.3 4.0 5.0
Construction 7.2 16.2 11.8 10.1 6.5 4.0 8.0
Services 55.7 10.6 11.2 10.9 9.6 7.0 8.0
Trade, Transport, Comm 28.0 12.1 12.8 12.4 10.3 7.5 9.0
Financing & Insurance 14.6 11.4 13.8 11.7 8.6 7.0 8.0
Comm & Social Services 13.1 7.0 5.7 6.8 9.3 6.0 6.0
GDP 100.0 9.5 9.7 9.0 7.1 5.5 6.6

™ FY09 Highlights: The 7.1% growth was led by agri up 2.6%, industry up 4.8% and services up 9.6%.
This data could see a small revision given that trends in industrial growth, exports, and taxes have
weakened considerably since Oct08.

™ The 9.6% growth in services growth was primarily due to (1) communications where a proxy is the
continued buoyancy in mobile telephony and (2) community and social services – largely due to
government expenditure (elections + pay commission).

™ FY10 Outlook: We expect growth in industry and services to slow further to 3.6% and 7% respectively.
Agri is the wild card where a bumper crop could result in overall growth coming in over 6%.

Trends in GDP by Expenditure (%)

FY06 FY07 FY08 FY09 FY10E FY11E

Total Consumption (% GDP) 69.8 67.4 66.9 67.6 68.0 68.0
% YoY 6.7 5.9 8.3 8.2 6.0 6.5
Private Consumption (% GDP) 59.5 57.5 57.2 57.0 57.1 57.0
% YoY 6.8 6.0 8.5 6.8 5.6 6.5
Public Cons (% GDP) 10.3 9.9 9.8 1.6 10.9 10.9
% YoY 6.2 5.5 7.4 16.8 8.3 6.5
Gross Cap Formn (% GDP) 33.3 34.0 35.9 37.1 36.5 36.1
Fixed Cap Formn (% GDP) 29.2 30.5 31.6 32.1 31.8 31.9
% YoY 17.6 14.5 12.9 8.9 4.3 7.0
Net Exports (% to GDP) -2.8 -3.5 -4.3 -6.5 -6.4 -5.3
Real GDP 9.5 9.7 9.0 7.1 5.5 6.6

™ FY09 Highlights: Overall consumption growth held up due to the public sector (elections + pay
revision), while investment growth slowed due to higher rates and slackening demand.
™ FY10 Consumption: While public sector growth will likely hold, higher interest rates coupled with
increasing job losses/wage freezes across sectors are adversely impacting consumption – particularly
discretionary spending.

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™ FY10 Investment: Though the current capex story is far healthier than the one in the 90s, the headwinds
on account of higher cost of capital, elongation of working capital cycle, slowing demand and limited
fiscal maneuverability will likely result in a further deceleration in capital formation.

Trends in GDP by Expenditure (% Contribution)

Trends in GDP by Expenditure (% Contribution)

contribution to GDP
25.0
8.7 9.1
6.9
20.0 9.6
7.1
7.9
6.5
15.0 5.5
5.3 3.5
10.0 4.0

5.0
0.0
-5.0
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10E

FY11E
-10.0

Final Consumption Gross Capital Formn

Net Exports Total GDP

™ The contribution of investments which had risen to nearly 40% of GDP growth during FY03-FY08 is
likely to slow further in FY10.

™ However, tailwinds which include the monetary and fiscal stimulus coupled with lower commodity
prices could help a recovery in FY11.

Source: Citi