Generous spending by the government and an unexpectedly strong agriculture growth helped ensure a healthy Q2 GDP increase of 5.3%, but there are the usual one-offs that will ensure full-year growth won’t rise above 5.5% or thereabouts. On one hand, the strained fisc means government expenditure will have to be savagely curtailed in Q4; the stronger rupee, coupled with a slowing economy in key markets such as Europe and China, means that the export engine of growth will remain muted in the rest of the year. Not surprisingly, given the monthly IIP data, industrial growth continued to be a laggard, nearly halving at 2.2% in Q2 as compared to 4.2% in Q1; within this, manufacturing plunged to 0.1% versus 3.5% in Q1. Mining, which provided a bit of a cushion by growing 1.9% in Q2, is expected to take a few quarters to really pick up—after that, the measures taken to develop coal mines should start yielding results and, hopefully, iron ore mining licences will be renewed in Odisha and Jharkhand.
The most worrying piece of data, of course, is the 1.5% contraction in gross capital formation in Q2. Juxtapose this with the $103 billion of projects the Project Management Group is supposed to have cleared, and it is clear there is something wrong since loan growth has not picked up commensurately. While one part of the reason for this could be slowing global demand for projects that were planned in the past—and recently cleared by PMG—another is the high interest costs. An analysis of the 300 bps fall in India’s GDP growth by BoFA-ML suggests that while around half of this is due to global factors, about 75 bps is due to monetary tightening and 50 bps is due to the falling capex. While it is true, indeed this is always so, that interest costs alone do not make business invest in new projects, the large role played by interest costs cannot be denied. According to BoFA-ML, using the core WPI—which is what matters for producers—real lending rates are at 12.5% right now against the average of 8.8% since 1997. At such rates, and with a poor global demand scenario, a large number of investments simply aren’t viable.
With crude prices testing new lows every day, there is no longer any possibility of fuel shocks that need to be passed on to consumers; and with global food prices low and local procurement price hikes being kept to the minimum, it is difficult to see how inflation is going to be a problem any time soon. Unless, of course, RBI is still setting store by its inflation expectations survey that still predicts a December CPI of 14.6% against the October levels of 5.52%.