Given how Q1FY18 was impacted by the rollout of the GST, there is no doubt the rebound in the economy from the lows of that quarter was encouraging. A 6.3% y-o-y rise in GDP in the September quarter versus 5.7% y-o-y in Q1 indicates the economy may have put the disruption from demonetisation and GST behind it. However, given the several weak spots—agriculture, exports, services and government spends—it is hard to tell whether growth will accelerate meaningfully from here onwards to levels beyond those warranted by the base effect. That there was a recovery in spite of a very subdued uptick in agriculture (just 1.7% y-o-y) and very little government spending (just 4.1% y-o-y) is certainly good news. What seems to have driven the headline numbers is a pick-up in the industrial sector, where manufacturing clocked 7% y-o-y. Some of this would have to be due to the re-stocking that took place post the de-stocking in Q1FY18 and some of it due to an early festive season. Nevertheless, any revival in demand is encouraging.
The other number that seems to have brought cheer is the pick-up in investments which increased 4.7% y-o-y, the highest in several quarters, compared with an increase of just 1.6% y-o-y in Q1FY18. Any revival in investments is to be celebrated. What is curious, though, is that data from CMIE continues to be less than encouraging, with project starts still slow and the number of stalled projects not really falling meaningfully. Moreover, the order books at engineering companies such as BHEL don’t show any big change; in fact, L&T’s order inflow guidance remains very conservative and the management doesn’t see any resurgence in private sector investments in the near-term. Also, as a share of GDP, gross fixed capital formation slipped to 28.9% in Q2FY18 from 29.8% in Q1FY18 and 29.4% in Q2FY17.
There are, in fact, several pressure points. The growth in services—a segment that creates jobs—moderated sharply to 6.6% y-o-y, partly because the construction segment has been hit by an inactive real estate sector. And private consumption clocked a growth of 6.5% y-o-y, the slowest in at least five quarters. Given that cash has returned to the system, and that the festive season kicked in earlier, the loss of momentum in private consumption spends is disappointing. It is, however, true that there was some substantial buying of items such as two-wheelers both in March—in the run up to the withdrawal of BSIII vehicles—and in the June quarter, when dealers offloaded inventory at discounts. However, given how agriculture posted only a 1.7% y-o-y increase (compared with a 2.3% y-o-y rise in Q1FY18), it is possible rural spends have slowed and could remain subdued. At a time when government spends are very weak—up just 4.1% y-o-y in Q2FY18, compared with a rise of 17.2% y-o-y in Q1FY18 and 31.9% y-o-y in Q4FY17—slowing private consumption spends are a worry. The government is unlikely to be able to spend meaningfully in H2FY18, given fiscal constraints. With no big bounce expected in investments, moderating consumption could crimp growth. The September quarter performance, therefore, is best described as an improvement. It may be a little too soon to declare the economy has staged a turnaround.