Turning the corner 

Turning the corner 

Context

Release of 2^nd Quarter GDP data

A sigh of relief

Author states that there was a collective sigh of relief when the second quarter GDP data were released officially by the Central Statistics Office (CSO). The government officials were relieved that a declining trend of four consecutive quarters of growth had finally been reversed

Trend reversal

GDP growth came at 6.3% for the quarter ending September, higher than 5.7% in the previous quarter, but still lower than 7.5% a year ago. The Finance Minister said that the effects of the demonetisation and initial rollout of the goods and services tax (GST) were behind us

Data

• Industrial growth accelerated from 1.6% during the June quarter to 5.8% in this September quarter. Its subcomponent, manufacturing, too grew faster at 7% compared to only 1.2% during the previous quarter
• The services component of trade, hotels, transport and communications also grew smartly at 10.5% for the half year, as compared to 8.3% a year ago

Private sector investment: cause for worry

Author states that although industrial revival is an absolute must for sustained growth in employment and output but it should also be accompanied by an increase in private sector investment, which is still lackluster

• Decline in Gross Fixed Capital formation (GFCF): The portion of GDP growth coming from fixed capital formation (which stands for investment activity) declined from 27.5% in the first quarter to 26.4% now

Silver lining

Author points out that the CSO says that GST collections data are provisional, and could be an underestimate. To that extent an upward revision of the GDP data is possible in the future

Why did stock market drop?

So if the GDP trend is satisfactory, why did the stock market react so negatively?

Author mentions that the stock market today is swayed by a relatively small minority of deep pocket investors (and increasingly algorithms and bots), so its reaction is not representative of what’s happening to the broad-based economy. Even so, despite these caveats, it’s useful to pay heed.

• Fiscal deficit: Author states that the market was spooked by the data on fiscal deficit. At this stage of the fiscal year, the deficit is running at 96.1% of the annual target. Last year at this stage it was only at 79.3%
  • Higher revenue spending: The revenue expenditure component (roughly salaries, pensions, interest payments, etc), which is not the productive spending on items like infrastructure, is growing at twice the rate as budgeted (10% against 5%). The higher deficit would have been acceptable had it been on account of higher capital spending, not higher revenue spending
  • Options before the government: The government can either cut further into capital spending (which tends to be discretionary, or can be postponed to the next budget year) or it can increase its market borrowing to tide over this year. Either way it is not good news for the markets. That’s because the former implies lower economic growth, and the latter implies higher interest rates. This could be the main reason for the markets crashing

Slowdown in private sector investment

• It is constrained by low capacity utilisation, deleveraging of balance sheets (as companies are reducing loan burdens), insolvency resolutions and large influx of imports, especially manufactured goods

Slowdown in consumption spending

Consumption spending has started losing steam. Its growth went down a notch from the last two quarters.

• Nearly two-thirds of India’s GDP is consumption spending, and remains the key to sustaining the growth momentum. Its slowing means that purchasing power both in rural and urban areas is under pressure. Mounting inflation rates are not helping. The situation on job creation is still bleak. Large job creating sectors like construction, agriculture, textiles, leather and tourism need to exhibit more energy

Sluggish exports

Author states that when the world economy does well, India’s exports should be flourishing. The exporting sector’s fortunes are closely linked with the manufacturing sector. Exports create jobs, especially in small and medium enterprises

• Why can’t India’s small enterprises sell on global portals like Alibaba and Amazon? What are the hurdles?
• Is the GST framework (with delayed refunds) inhibiting the growth of exports?
• What are the policy and other bottlenecks?
• These are the issues that we need to grapple with to sustain an upward growth path.