Two sets of contrasting data welcomed the first week of the new year. The first one was the Manufacturing PMI (Purchasing Managers index), which expanded the fastest in five years in December 2017. The second was the CMIE data for new projects, which plunged to a 13-year low in the same month. Conflicting picture on the state of the economy! Should one be cautiously optimistic or pessimistic?
For the number-crunchers that prefer to focus on GDP estimates, the CSO’s first advance estimates for FY18 painted a mixed picture as well: GDP growth projection at 6.5% was in line with the market consensus but the lowered nominal GDP estimates triggered concern that the government would have to cut capital expenditure that would undermine growth in the forthcoming quarters. But here is the real glitch: projected growth of gross value addition (GVA) came in 40 bps lower at 6.1%. If this projection turns out closer to actual out-turn then the RBI runs the risk of missing its GVA growth projection by 60 bps—a significant error margin at a time when the inflation-output trade-off is delicately poised.
But more fundamentally, what signifies this divergence between GDP and GVA growth rates? It could be because of the discrete payment schedule for government subsidies—a recent CGA report has indicated delay in subsidy payments could overstate net indirect taxes (net of subsidies). If so, growth in net indirect taxes could slow down when these payments are eventually made in future, leading GDP growth to converge towards lower GVA growth. Or, faster growth in indirect taxes at the aggregate level could be a crude measure for their regressive nature during the downside of the business cycle, especially when space for fortuitous gains like recent taxes on petroleum did not exist. This could impact consumption, and thereby GVA growth itself, as divergence persists into the future. One hopes analysts making ebullient growth projections for 2017-18 are adjusting for such adverse possibilities!
This apart, a steady flow of lead indicators suggest the economy maintained the upturn spotted previously in the July-September growth numbers. With the direction set upwards, the question is if this trend sustains or could fizzle out as has happened ever so often in recent years.
Let’s focus on the Manufacturing PMI, which rose above its long-term average value (54) and displayed a consistent expansion from August 2017. Other robust signs in this index were that output, domestic as well as foreign orders both increased, while manufacturers’ sentiments were positive due to improvements in economic conditions. Barring the month of October, the PMI trends match growth trends in standalone indicators such as exports, industrial or rather capital goods’ production, core industries’ output and bank credit off take in broadly the same period. What’s more, the services’ PMI that had slipped into contraction zone in November, returned to growth (50.9) in December, indicating a spread-out recovery. Although services segment remains weak—seen earlier in July-September GDP estimates as well—the indication is positive.
These features suggest that the reversal of a five-quarter long growth deceleration in July-September 2017 probably extended into the December 2017 quarter. Quite likely that this trend may persist into the next or last quarter of this financial year (January-March 2018). The question though is whether this turnaround, which differs from previous ones due to a favourable external demand environment, is sustainable. Can it prop itself up without support from government-led capex and is more defined by a pick-up in private business spending? Such a mix has been missing from the composition of growth for several years in a row, making every upturn seem a false dawn or suspect from a sustainability perspective.
On this question, i.e., the return of investments and its appeal for businesses, current trends and signals are quite puzzling. On one hand, there is extreme optimism as reflected in responses to a countrywide survey of 40 CEOs conducted by the Business Standard newspaper (January 1, 2018): Four-fifths or 80% of the surveyed chiefs plan to increase investments in 2018; they will also hire more people, 90% consider their companies’ growth will be higher this year. And 50% of the respondents expect economic growth above 7.5% in 2018.
The CEOs’ optimism is a vivid contrast to information on investment projects collected by private data firm, CMIE, on the other hand. According to this database, new project announcements fell to a 13-year low in December 2017. At `77,000 crores, the decline was spread quite evenly across public and private sectors and was the sharpest in manufacturing where almost 30 percent aggregate capacity remains consistently unutilized for over three years. Nearly a quarter percent of private projects were stalled in the December 2017 quarter, the highest rate ever and exceeding the 23.8% mark reached in December 2003 according to a Mint report. Moreover, the stalling rate of private projects crossed one-fifths of total in 2017; the extent of projects stalled has steadily inched up two percentage points on average each year from 2015. What is particularly disheartening are factors the CMIE listed for delays or stalling of current projects—usual suspects like environment clearances, land acquisitions, bureaucrat hurdles, and so on!
The private business tendencies captured by CMIE certainly do not reflect any investment buoyancy. To the contrary, one might infer that animal spirits are flagging! Whether this represents the true state of affairs or instead the PMIs and CEOs do, is important to know for deciding the evolution of the current upturn into full-fledged, investment-driven growth ahead.
As the current growth pick-up is undoubtedly boosted by a turnaround in the world economy—there has been a synchronised strengthening of PMIs across countries and regions—which put in its best post-crisis performance in 2017 after its temporary rebound of 2010, it is notable that the combined force of domestic and external demand have so far failed to lift up investments and reduce the manufacturing slack. From this perspective, a comeback in investments may be some distance off. Global economic prospects in 2018 are moderately positive, marked by monetary policy adjustments in the advanced economies and financial market disturbances along with rising risks of a recession. Sizeable opinions veer to the view that last year’s low inflation-high growth combination may not hold out through 2018. All this adds up to uncertainty, over and above the existing slack.
In the light of all these mixed trends, it is difficult to be sure or sanguine about endurance of the current upturn. It appears that optimism hinges upon the successful roll out of the GST, which is still muddling through. On the only component satisfying the sustainability measure—revival in investment spends—there is still little evidence in favour.
The author is New Delhi-based macroeconomist.