Upward revision due to new IIP would be concentrated in 1HFY17
Irrespective of the new IIP (index of industrial production) series (2011-12 base), which is a key ingredient in quarterly GDP estimates and shows much higher growth than the old IIP series (2004-05 base), we continue believing that real GVA/GDP growth (2011-12 base) will likely be ~6% YoY in 4QFY17, much lower than in previous quarters.
Real GVA growth for 1HFY17, however, is likely to be revised upward to 7.3%, as against 6.8% estimated previously. Consequently, real GVA growth for full-year FY17 may be revised from previously estimated 6.4% to 6.8%, while it could be broadly unchanged for FY16. Real GDP accordingly could post growth of 7.2% in FY17 – higher than our earlier estimate of 6.8%.
As far as the impact on our monthly economic activity index (EAI) is concerned, which has very strong correlation with real GDP growth excluding discrepancies, we find that while economic activity grew faster than previously estimated in FY17, it was broadly similar in FY16. Nevertheless, the revised EAI also witnesses strong deceleration in 4QFY17.
Impact of new IIP on real GVA/GDP estimates
With the new IIP series (2011-12 base), real GDP growth for past two years is likely to see a revision. Notably, GDP estimates for FY14 and FY15 are unlikely to be revised because they already include estimates from annual survey of industries (ASI) – more comprehensive database – rather than IIP. Thus, our analysis also focuses on the likely revisions in GVA/GDP estimates for FY16 and FY17.
New IIP series shows much higher growth than old series for FY17…:
Although IIP growth for FY16 is revised upward from the earlier estimate of 2.4% YoY to 3.4%, it is revised rather dramatically from ~0.6% to 5% in FY17 (Exhibit 1). In fact, IIP growth for 1HFY16 is revised downward in the new series, while the major upward revisions have taken place between 4QFY16 and 2QFY17. A look at the three key components of IIP shows that while mining activities have grown faster over past two years, the growth path appears similar to the old series. Further, while the electricity sector has not witnessed any significant changes in the new series, manufacturing activities have witnessed most dramatic (upward) revisions in FY16 and FY17 (Exhibit 2).
which will lead to slight upward revision in FY16 real GVA/GDP growth…
Although IIP is a key ingredient for estimating quarterly GVA, it is used as a proxy to estimate only ~25% of the manufacturing sector (quasi corporate and unorganized sector). For another ~70%, estimates are arrived at from the available data of the listed companies. Thus, with the new IIP, the estimates for the quasi corporate and unorganized sector (which accounts for only ~25% of the manufacturing sector) will undergo revisions, while the bulk of the manufacturing sector will remain unaffected (Exhibit 3). Consequently, we expect only a marginal uptick in manufacturing GVA for FY16 – from previously estimated 10.6% to 10.8% (Exhibit 3- 4). This would lead to an upward revision of 10 basis points (bp) in real GVA growth in FY16 – from 7.8% to 7.9%. (Exhibit 5).
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