Indian Economy Update-feb 2009

Indian Economy Update FY09 GDP comes in at 7.1%; FY10 estimate at 5.5% Trends in GDP (%YoY)

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High growth phases 9.5 9.7

10 8.5

8

7.3 7.3

7.8

7.5 6.5

6

5.9 5.3

5.1

4.8

6

9 7.1

5.8

6.6 5.5

4.4 3.8

4 2

1.3

FY11E

FY09E

FY07

FY05

FY03

FY01

FY99

FY97

FY95

FY93

FY91

0

™ 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 fullyear 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) Agriculture Industry Manufacturing Mining & quarrying Elect. Gas, water supply Construction Services Trade, Transport, Comm Financing & Insurance Comm & Social Services GDP

Weights* 17.8 26.5 15.2 2.0 2.0 7.2 55.7 28.0 14.6 13.1 100.0

FY06 5.8 10.2 9.1 4.9 5.1 16.2 10.6 12.1 11.4 7.0 9.5

FY07 4.0 11.0 11.8 8.8 5.3 11.8 11.2 12.8 13.8 5.7 9.7

FY08 4.9 8.1 8.2 3.3 5.3 10.1 10.9 12.4 11.7 6.8 9.0

FY09 2.6 4.8 4.1 4.7 4.3 6.5 9.6 10.3 8.6 9.3 7.1

FY10E 3.0 3.6 3.5 3.0 4.0 4.0 7.0 7.5 7.0 6.0 5.5

FY11E 3.0 5.8 5.0 5.0 5.0 8.0 8.0 9.0 8.0 6.0 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 (%)

Total Consumption (% GDP) % YoY Private Consumption (% GDP) % YoY Public Cons (% GDP) % YoY Gross Cap Formn (% GDP) Fixed Cap Formn (% GDP) % YoY Net Exports (% to GDP) Real GDP

FY06 FY07 FY08 69.8 67.4 66.9 6.7 5.9 8.3 59.5 57.5 57.2 6.8 6.0 8.5 10.3 9.9 9.8 6.2 5.5 7.4 33.3 34.0 35.9 29.2 30.5 31.6 17.6 14.5 12.9 -2.8 -3.5 -4.3 9.5 9.7 9.0

FY09 67.6 8.2 57.0 6.8 1.6 16.8 37.1 32.1 8.9 -6.5 7.1

FY10E FY11E 68.0 68.0 6.0 6.5 57.1 57.0 5.6 6.5 10.9 10.9 8.3 6.5 36.5 36.1 31.8 31.9 4.3 7.0 -6.4 -5.3 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. 2

™ 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 6.9

20.0

9.1

8.7 9.6

7.1

7.9

6.5

15.0 10.0

5.5 3.5

5.3 4.0

5.0

Final Consumption Net Exports

FY11E

FY10E

FY09

FY08

FY07

FY06

FY05

FY04

FY03

-10.0

FY02

-5.0

FY01

0.0

Gross Capital Formn 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

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