India?s data environment, despite having improved manifold over the years, still retains significant residual uncertainty. A case in point are the massive revisions in some components of the eight-industry Core Sector Index, which are updated sequentially every month for data 12 months prior. The latest is for the month of January 2013 (that?s 2013), particularly in the refinery throughput segment, where growth was revised up from the earlier 10.9% to 35%, resulting in overall core sector growth revision from 3.7% earlier to 8.4%. Optically, January 2014 growth of 1.6% would have been higher at 6.1% in the absence of the revision. The revision might be capturing the operation of an individual refinery, but the delay is certainly inexplicable. This uncertainty necessitates not just a detailed look at sub-components of a dataset to interpret the headline, but also a reconciliation between different datasets, for direct or indirect validation. The proximate reason for this article is the HSBC Markit Manufacturing print for February 2014 showing a strong uptick, originating in new orders. While the current growth environment is undoubtedly weak, might this signal impending recovery?
The October-December (Q3FY14) GDP data point to an economy that is weaker than not just what was anticipated, but also in relation to actuals reported. Compared to street expectations of 4.9% growth, the actual number was 4.7%. Two key indicators of the slowdown?construction from the output side of GDP and fixed capital formation from the demand side?reinforce the widely known, if inadequately understood, slowdown in the capex cycle. But a concern is this weakness might be even sharper than the headline suggests. The key drivers of Q3 growth have been the ?financial, real estate and business services? and ?community, social and personal services?. Growth in the former segment (which is almost a tenth of GDP) rose to 12.5% in Q3 from 10% in Q2. In the latter, growth was still 7%, up from 4.2% in Q2. Part of this segment (about 6%) is public administration and defence, i.e., government services.
Financial services comprise banking and life & general insurance, predominantly the former. The output of this segment is the ?sum of aggregate deposits and credit, deflated by WPI? (what RBI terms ?bank business). In Q2- and Q3FY14, growth would have inflated by, first, an increase in credit (from 14% yoy end-June to 18.4% by early-September). Second, a sharp increase in bank deposits (from 13% yoy end-August to 16.9% by mid-December) due to the R1.6 trillion FCNR inflows. Adjusted for these one-time inflows, if financial services growth had actually been at the Q2 level of 10%, GDP growth is likely to have been around 4.4%.
How do these numbers stack up against reported company results? The accompanying charts show that the two datasets mostly move in tandem, even if the correlation is weaker for services. A compilation of Q3 results of 1,756 companies (sourced from CMIE, excluding financials, energy and trading) suggest that manufacturing growth might have been as weak as GDP data suggest whereas services fared a little better. Growth of sales (nominal) fell to 7.9% in Q3 from 8.3% in Q2. Moreover, this was entirely led by services, with nominal manufacturing growth down to 5.5% (1,356 companies). Services (with 400 companies) have done much better (15.2% growth, ex-financials and trade) but for a significant chunk (IT, pharma, this effect is inflated in Q2 and Q3 by the fall in the rupee, with overseas revenues boosting domestic sales.
While difficult to predict what might be the actual full FY14 growth, it is becoming more likely that the FY14 advance estimates of 4.9% might be missed by 20-30 basis points. The currently reported growth rates in the first 3 quarters of FY14 were 4.4, 4.8 and 4.7%. To get a 4.9% growth for the full FY14, the fourth quarter growth will need to be 5.5%, which, on the face of it, seems unlikely, with an inordinately high growth in agriculture output absent (unlikely given the first projections of foodgrain output). In the banking sector, credit growth has reverted to the more usual 15% growth in early-February and while deposit growth still remains on the higher side, it is likely to taper in the final months leading to a slowdown of GDP financial services growth. Government expenditure, too, is likely to be flat compared to FY13.
Returning to the February PMI print mentioned earlier, an anomaly which needs to be emphasised, though, is an apparent return of some pricing power for companies in the current weak growth environment despite the pervasive weakening of demand. This needs to be explored in greater detail as it has implications for the growth inflation trade-off.
With contributions from Abhaysingh Chavan. The author is senior vice-president and chief economist, Axis Bank. Views are personal.