February 2012

CRISIL EconomyFirstCut
GDP: Growth slips below 7 per cent in FY12
Overview: Indias GDP growth for the first time after the global crisis of 2008 will slip below 7 per cent. Central Statistical Organisation (CSO) has pegged GDP growth for FY12 at 6.9 per cent. As the GDP growth during first-half of FY12 stands at 7.3 per cent, GDP growth in the second half will be lower than the first half. Hit by the global headwinds and high interest rates industry is expected to grow at 3.9 per cent in FY12. However, services sector growth is expected to do well and is pegged at 9.4 per cent for FY12. On the demand-side, due to high interest rates and poor sentiments both consumption and investment growth is expected to decline but the decline will be more pronounced in case of investment growth which is expected to fall from 7.5 p er cent in FY11 to 5.6 per cent in FY12. Lower GDP in FY12 clearly is an outcome of a combination of domestic (policy log-jam, high interest rates, stubborn inflation) and global (sovereign debt crisis in EU) factors. Going forward though we expect inflation and interest rates to ease, global environment still looks uncertain. Hence, we expect GDP in FY13 to grow at 7.0 per cent. Agricultural output growth is expected to decline to 2.5 per cent in FY12 from 7.0 per cent in FY11, mainly due to high base of last year. In absolute terms though agricultural output is expected to reach record levels as after kharif now even rabi harvest is likely to be good. Plagued by high interest rates and slowing economy manufacturing sector growth is expected to decline to 3.9 per cent in FY12 from 7.2 per cent in the previous quarter. On the other hand, mining sector which faced regulatory hurdles and also ban on iron ore mining in few sates is expected to witness a contraction of 2.2 per cent in FY12 as compared to 5.0 per cent growth in FY11. However, electricity sector did rather well and is expected to record a growth of 8.3 per cent in FY12 as compared to 3.0 per cent in FY11. Services have been the most resilient sector of the Indian economy and the same is once again demonstrated by its performance in FY12. It is expected to grow at 9.4 per cent in FY12. Within services, trade, transport and communication grew the fastest at 11.2 per cent in FY12 as against 11.1 per cent in FY11. Hit by high inflation and decline in demand in interest-sensitive sectors, private final consumption expenditure, the largest component of aggregate demand, is expected to moderate to 6.5 per cent in FY12 from 8.1 per cent in FY11.

Supply side components (growth, y-o-y) Supply side components (growth, y-o-y) H1FY H1FY
11 12 7.3 3.6 4.2 4.9 2.7 -0.5 9.6 11.3 9.8 6.1 FY11 8.4 7.0 7.2 7.6 8.0 5.0 9.4 11.1 10.4 4.5 FY12 6.9 2.5 3.9 3.9 4.8 -2.2 9.4

Demand side components (growth, y-o-y)

H1FY H1FY Demand side components (growth, y-o-y) 11 12 FY11 FY12 7.5 6.5 3.9 5.6 2.9 14.3 17.5

GDP at factor cost Agriculture Industry Manufacturing Construction Mining & Quarrying Services Trade, Hotels, Transport & Communication Financing, insurance, real estate and business services Community, social & personal services

8.6 3.7 8.1 9.1 7.2 7.7 10.0 11.1 9.9 8.0

GDP at market price Private Consumption Govt. Consumption Fixed Investment Change in Stocks

8.9 9.2 6.5 10.7 7.9 10.1 13.3

7.6 6.1 3.1 3.5 3.1 25.9 17.2

9.6 8.1 7.8 7.5 37.4 22.7 15.6

11.2

Exports
9.1 5.9

Imports

GDP Growth as in the past years was again led by the services sector. Industrial growth which was adversely impacted by the high inflation and high interest rate regime in FY12, may however witness some relief on this account with the turn in interest rate cycle in FY13. d slowdown in export growth in coming monthsal growth for Source: Central Statistical Organisation (CSO) & CRISIL

Investment growth declined in FY12, mainly due to high interest rates and domestic policy log-jam. Although, investment growth is expected to remain muted in FY13, it may, however, pick up in response to swift govt action and reversal in interest rate cycle. .

` computationsFY12 could slow further, due to cumulative the rest of

impact of monetary tightening, waning of one-time impact of past fiscal stimulus and expected slowdown in export

CRISIL EconomyFirstCut - IIP

Manufacturing & Mining pull down industrial growth (y-o-y, growth)

GDP and sectoral growth rates ( y-o-y, growth)

7.2

7.6 8.4 5.0 3.9 3.9 6.9 7.0 7.2

9.4 9.4

3.9 2.5 -2.2 FY 11 FY 12 FY 11 FY 12 FY 11 FY 12 GDP Agriculture FY 11 Industry FY 12 Services

Industry

Manufacturing

Mining

While higher interest rates pulled down manufacturing growth, mining sector was adversely impacted by regulatory hurdles. With the exception of services sector, the overall GDP and its two main components agriculture and Industry have recorded lower growth in FY12 as compared to last year.

Global environment adversely impacted Indias growth

Growth in Euro Area and US
3.0 100.0 80.0 1.9 1.5 1.1 1.5 20.0 0.0 0.4 0.0 Mar-11 Sep-11 Oct-11 Dec-11 Jan-12 Mar-11 Sep-11 Oct-11 Dec-11 Jan-12 Euro Area US -20.0 -40.0 -60.0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 2.0 1.8 60.0 40.0

India's export growth (y-o-y, growth)

1.8

Source: S&P, January 2012

Source: Ministry of Commerce

Embroiled in sovereign debt crisis economic outlook of Euro Area continues to be grim. This is not only hurting the growth prospects of other advanced economies but also of emerging economies like India through trade, investment and exchange rate channel. Merchandise exports growth after peaking in July 2011, has begun to moderate in line with the fragile global economic situation. Given the uncertain global environment, exports growth will remain under pressure during FY13.

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