India real GDP rebounds and climbs 5.7% y-o-y in 2Q14

Overall growth data is very encouraging.

India’s real GDP growth rose to 5.7% y-o-y in Q2 from 4.6% in Q1 2014, above expectations, with the consensus at 5.5% and Nomura at 5.9%.

According to a research note from Nomura, in terms of sequential momentum, GDP growth rose sharply to 8.8% q-o-q saar in Q2 from 4.6% in Q1.

Non-agricultural GDP growth rebounded sharply to a nine-quarter high (6.0% y-o-y in Q2 from 4.3% in Q1) led by a pickup in both the industrial (4.0% vs -0.5%) and services sectors (6.6% vs 5.8%) with a particularly sharp uptick evident in output growth in the manufacturing, electricity and utilities, construction and community and personal services sectors.

Agricultural growth moderated, but remained at a healthy pace (3.8% y-o-y in Q2 from 6.3% in Q1).

Here’s more from Nomura:

On the demand side, growth in GDP at market prices eased to 5.8% y-o-y in Q2 from 6.1% in Q1.

The moderation was primarily caused by (1) a reduced contribution from net exports: 3.0 percentage points (pp) from 3.7pp in Q1 (exports were strong, but the rate of import contraction eased) and (2) a bigger drag from inventory drawdown.

Encouragingly, the recovery in domestic demand was faster with its contribution to overall growth at 3.9pp in Q2 from 3.0pp in Q1.

Within domestic demand, real fixed investment growth rose sharply (7.0% y-o-y in Q2 vs -0.9% in Q1), the fastest pace in nine quarters. While greenfield expansion will take time, a cyclical recovery in fixed investment because of debottlenecking of existing investment projects was likely underway even before the new government assumed office.

Additionally, demand was buttressed by an 8.8% rise in government spending, reflecting pent-up spending in Q2 (after the belt tightening in Q1 2014). By contrast, real private consumption slowed (5.6% y-o-y in Q2 from 8.2% in Q1) – likely reflecting weaker rural demand.

Overall, today's data are very encouraging as they suggest incipient signs of a domestic-demand recovery after nearly two years of stagnation.

The growth mix - led by investments - is also a positive and we expect the recovery to be sustained.