>GDP Growth in QE Sept 2009 - Much Stronger Than Expected (MORGAN STANLEY)

• GDP growth accelerated to 7.9% in QE Sept 2009: The Central Statistical Organization (CSO) announced that GDP growth in the quarter ended September 2009 (QE Sept 2009) was 7.9%, the highest since QE June 2008. This compares with 6.1% registered in QE June 2009 and 5.8% registered in QE March 2009. The growth was much higher than our expectation of 6.4% and consensus expectation (as per Bloomberg survey) of 6.3%.

• Positive growth in agriculture segment was a surprise: Growth in the agriculture sector decelerated to 0.9% in QE Sept 2009 (vs. 2.4% earlier). The deviation in actual GDP growth numbers in QE Sept 2009 from our forecasts is largely on account of positive growth in the agriculture segment vs. our expectation of a decline due to poor monsoons. Growth in mining and quarrying, on the other hand, accelerated further to 9.5% in QE Sept 2009 (vs. 7.9% earlier).

• Industry segment growth largely in line with our expectations: The industry segment growth accelerated to 8.2% in QE Sept 2009 compared to 4.8% in the previous quarter. Within industry, the manufacturing segment growth picked up sharply to 9.2% (vs. 3.4% earlier). While growth in the electricity, gas & water supply segment accelerated to 7.4% (vs. 6.2% earlier), the construction segment growth decelerated to 6.5% (vs. 7.1% earlier).

• Services segment growth higher than expected due to higher-than-expected growth in government revenue expenditure: Growth in the services sector accelerated to 9.3% in QE Sept 2009, compared with 7.8% in the previous quarter. Within services, the growth in the community, social & personal services segment accelerated sharply to 12.7% vs. 6.8% earlier due to higher government spending in this quarter. While growth in the trade, hotels, transport &
communication segment accelerated to 8.5% (vs. 8.1% earlier), the financing, insurance, real estate & business services segment growth decelerated to 7.7% (vs. 8.1% earlier).

• Growth in consumption and fixed investment accelerated: In QE Sept 2009, consumption expenditure growth accelerated to 8.4% from 2.8% in the previous quarter, driven by acceleration in both private and government consumption expenditure growth to 5.6% and 26.9%, respectively (vs. 1.6% and 10.2% in the previous quarter). Fixed investment growth accelerated to 7.3%, compared with 4.2% in the previous quarter. Net export contribution to growth was 6.1%, compared with 3% in the previous quarter, as the contraction in imports more than offset the decline in exports.

• Upside risks to our F2010 GDP growth forecasts: We believe the headline GDP growth for QE Sept 2009 has been overstated by accounting for poor agriculture growth being pushed to the next quarter. However, even adjusting for this, the non agriculture GDP growth has accelerated sharply to 9% in QE-Sept 2009 (vs. 6.9% in the previous quarter) confirming that the pace of recovery is stronger than expected. We see upside risks to our full year F2010 GDP growth forecast of 6.4%.

• Normalization of interest rates under way: We maintain our view that the RBI will lift policy rates by 25bp in January 2010. By then, the RBI should have had adequate comfort on the pace of recovery. Indeed, we expect a cumulative increase of 150bp in the repo rate in 2010. However, note this potential rate hike is unlikely to derail the recovery as we see this increase in policy rates as a move toward normalization rather than tightening that hurts growth.

To read the full report: GDP