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Last Updated : Aug 31, 2015 03:49 PM IST | Source: CNBC-TV18

Services to drive Q1 GDP, early to cut FY16 forecast:Nomura

Given the robust supply side data, Sonal Varma of Nomura says GVA (gross value added) will be what the economists would be focusing on today when GDP (gross domestic product) numbers are released.

Services will be the key driver of GDP (gross domestic product) growth for the quarter ended June, while agriculture and manufacturing will continue to disappoint, says Sonal Varma of Nomura.

"Services is basically going to be the star performer and particularly the two sections one the trade transportation segment, our view is there has been a good pick up because of some of the real activity indicators like medium and heavy commercial vehicles sales or airline passenger freight or even cargo traffic actually have been good," she says. 

Given the robust supply side data, GVA (gross value added) will be what the economists would be focusing on today when GDP numbers are released, she tells CNBC-TV18.

Nomura expects Q1FY16 GVA at 7.3 percent versus 6.1 percent reported in the previous quarter.

Varma expects a positive reading in both GDP and GVA numbers. GDP at market price is expected at 8 percent and FY16 GVA at 7.5 percent and thereabouts. 

She says it would be premature to lower GDP estimates for the full year based on the readings for the first quarter.

"If you go back a quarter, last quarter there was a big confusion about whether the economy was picking up or slowing down because you had the GVA number falling all the way down to 6.1 and the GDP number going up all the way to 7.5 percent.

Our sense is that divergence basically gets addressed this time because both the numbers will be moving higher," she says.

Below is the edited transcript of Sonal Varma’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Our poll has thrown up a huge range of forecast all the way from 6.7 to probably 7.5-8 as far as the gross value added (GVA)is concerned and as well for the gross domestic product (GDP) it is a rather wide range. Can you begin by telling us whether we should concentrate on GDP or GVA?

A: Typically in India the supplies side data seems to be bit more robust as compared o the demand side estimation methodology so to that extent the gross value addition numbers is something that we will see a bit more focused. The other thing is the gap between GVA – GDP market price which is basically your net indirect taxes has gone up substantially because of the hike in some of the excise duties that were announced last year. So, that is also going to cause the gap between GVA and GDP to widen substantially. So, to get a sense of the underlying growth numbers, the GVA numbers is what most of us would be concentrating on.

Sonia: A lot of people have gone ahead and slashed their FY16 GDP forecast as well. In fact Ambit has just downgraded it to 6.8 percent from 7 percent earlier. What about you, what would you do with the full year GDP forecast? Has the time come to scale it down?

A: It is a bit premature to be scaling down growth numbers for couple of reasons. First of all let us wait for the print today. Our expectation is that there will be positive reading today. We are looking for the GVA number to be 7.3 percent vis-à-vis 6.1 percent last quarter. The headline GDP number we are expecting at around 8.3 percent versus 7 .5. If you go back a quarter, last quarter there was a big confusion about whether the economy was picking up or slowing down because you had the GVA number falling all the way down to 6.1 and the GDP number going up all the way to 7.5 percent.

Our sense is that divergence basically gets addressed this time because both the numbers will be moving higher. Second, the agriculture growth numbers obviously as compared to the expectation two-three months back looks like the overall production will be lower. However, the thing is last year was also a fairly bad year as far as agriculture production as concerned so overall agriculture GDP year over year growth rate for FY16 should still be positive as compared to the negative reading we had last year.

Third, a lot of the positive tailwinds that we have seen for India whether it is the Reserve Bank cutting rates or the banks cutting interest rates or commodity price fall or the cumulative effect of all the government policy actions that we have been seeing for the last one year the impact of all of that on India’s non-agriculture GDP growth rate is yet to be seen.

Again today’s number for the non agricultural GDP growth number should see a significantly strong rebound. So, all in all we are sticking to our forecast for a growth GDP at market price. Our expectation is a growth rate of about 8 percent and given that Q1 itself is starting out at 8.3 percent actually there is no reason to be downgrading.

Latha: And the GVA for the full year will be?

A: The GVA for the full year should be somewhere around 7.5 or slightly above 7.5 percent.

Sonia: If you can throw some more light on what are you expecting from the agri growth this time around because in FY15 it was just 0.2 percent. In the last quarter it contracted by 1.4 percent. Any recovery at all is what you are expecting this time?

Latha: Actually on all the three agri, industry and services, your breakup?

A: In terms of the drivers this quarter we are expecting agriculture and industry to remain on the weaker side so the big push to growth this quarter in our view is going to come from the services sector. Particularly for agriculture, rabi production has been. After the unseasonal winter rains production estimates were revised lower. So, our expectation is that agriculture GDP growth this quarter could be as low as actually the previous quarter which was about minus 1.4 percent.

Industrial numbers have largely been stable as far as the index of industrial production (IIP) readings are concerned but there tends to be a divergence between the IIP and the GVA numbers on manufacturing. Our assessment is that perhaps the manufacturing numbers could be marginally lower.

Like I said services is basically going to be the star performer and particularly the two sections one the trade transportation segment, our view is there has been a good pick up because of some of the real activity indicators like medium and heavy commercial vehicles sales or airline passenger freight or even cargo traffic actually have been good. They have picked up related to last quarter which suggests some pick-up in transportation activity.

Second, like I was mentioning earlier the real credit numbers, real deposit growth numbers have been marginally better than last quarter even though the normal numbers seems to be falling so the financial and real estate sector we think will be a better driver of growth.

Similarly, on the demand side the investment side has been fairly on a lower side actually hasn’t seen a big pick up. However, private consumption demand our view is going to pick up this quarter particularly with inflation coming down disposable incomes have gone up and discretionary demand has gone up so private consumption should be the big driver of growth this quarter.

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First Published on Aug 31, 2015 11:16 am
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