[T.S.R:17991] Ambit: India Will See Sub-Optimal Growth Even In FY13

Given the structural fault lines in the edifice of the Western economies

(particularly the US economy), we expect FY13 to be characterized by

continued macroeconomic uncertainty. History points to the detrimental

impact that uncertainty has on India's investment demand growth, which in

turn will spell continued weakness for the industrial sector growth. However,

the expected fiscal largesse of the Central Government ahead of the general

elections (scheduled for CY14) is likely to counter the downward pressure

imposed by weaker Industrial sector growth on Services sector growth.

Heightened economic uncertainty to mean sustained weakness in

investment demand

As highlighted in our note dated August 16, 2011, India's economic growth process

remains critically coupled with the pace of economic activity in the West, especially the

US economy. Low growth in the US economy and the resultant rise in risk aversion has

historically proved to be detrimental to India's capex cycle (see exhibit 1 and pg 3 of

this note for details). This dynamic is responsible for the historical phenomenon

whereby investment demand in India experiences sharp v-shaped dips in years that are

characterized by macroeconomic crises (see exhibit 2 for details).

Weakness in the US economy is likely to persist in FY13 (with the US Fed implicitly

admitting to the same by announcing 'operation twist' last night) as the US economy

undergoes a multi-year slowdown (refer to pg 3 and 4 of this note for details) and

global macroeconomic uncertainty persists . This in turn is likely to mean continued

weakness in India's capex cycle (which depends meaningfully on equity capital

inflows).

GDP growth to remain moderate at 7.2% YoY in FY12

We expect moderation in economic activity to persist in FY13 and expect GDP to grow

at 7.2% YoY (see exhibit 4 below for composition details, exhibit 5 below for

assumptions and pg 7 of this note for GDP growth model details).

Exhibit 4: Moderation in economic growth to persist in FY13

Growth (YoY) GDP Agriculture Industry Services Investment

demand

FY11 8.5% 6.6% 7.9% 9.4% 8.6%

FY12(E) 7.1% 2.1% 6.7% 8.6% 5.5%

FY13 (E) 7.2% 4.5% 6.3% 8.2% 4.5%

Source: CEIC, Ambit Capital research

Weakness in investment demand growth is likely to mean that industrial sector growth

will continue to remain subdued in FY13. Whilst weaker industrial sector growth will

prove to be a headwind for Services sector growth, Government revenue expenditure

is likely to support the Community, Social and Personal Services (CSPS) component of

'Services', which is likely to experience high growth ahead of the scheduled general

elections in CY14. Finally, the low base is likely to buoy up farm sector growth in FY13

assuming normal monsoons.

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