Part of latest GDP slump is one-off due to GST etc, but the overall trend suggests a long haul, especially for jobs.
Given the economy has been losing pace for several quarters now, and that the trend was noticeable even before demonetisation, the June quarter was never really expected to see a big bounce-back. However, the very sharp deceleration in GDP, at 5.7% y-o-y, and in GVA, at 5.6% y-o-y, are below even the most conservative forecasts. In fact, even during a very difficult time in Q4F17, GDP had clocked a reasonably good 6.1% y-o-y while GVA had grown at 5.6% y-o-y. This time around, the GDP has decelerated more than the GVA partly because of a big jump in subsidies during the quarter, up 40%-plus.
Not surprisingly, the manufacturing sector has borne the brunt of the GST rollout with companies compelled to resort to production cuts and to staying lean on inventory ahead of the new indirect tax regime in July. The poor profitability of the corporate sector during the quarter reflects the acute stress; for a sample of 1,410 companies, revenue growth was the slowest in three quarters while operating-profit margins contracted 105 basis points y-o-y, leaving operating profits flat. Agriculture, too, performed way more poorly than was expected to; while the rabi crop was a good one, the fairly sharp fall in prices of foodgrains and other crops has hit farmers’ incomes. That, in turn, would have hurt rural consumption. The return of cash into consumers’ pockets, in general however, appears to have pushed up spends on the services. The increase in private consumption, however, was subdued, growing at 6.7% y-o-y in Q1FY18 versus 7.1% in Q4FY17. Anecdotal evidence suggests purchases in consumer durables, in particular, were being put off until after GST. Again, government spending, although growing in double-digits, was slower than anticipated.
There was little change in the investment story. Investments have been crawling for more than a year now and, after contracting in the March quarter, saw a very slight revival in Q1FY18. On the whole, the headline numbers are far from encouraging—they may even seem depressing. However, the data for July and August are better. Automobile sales, for example, have seen a big jump across categories indicating that companies are scaling up production. The PMI for August is at 51.2, up from 47.9 in July. Even if consumption picks up, as we head into the festive season, the very sedate start to the year would warrant a re-look at forecasts for 2017-18. Going by current indications, GDP is at best likely to clock 6.5% this year, and there are many who believe even 6% is a tall ask. The bad news is that government could be very short on revenues with collections from telecom and RBI dividends not coming in as budgeted. That then could necessitate cuts in expenditure if it is to meet the fiscal deficit target. Even trimming expenditure at a time when the private sector is investing very little will hurt. Which is why the government may want to overshoot the expenditure limits. Without some serious assistance—financial and regulatory—the informal sector, which accounts for 80% of the economy has been badly hit by demonetisation, cannot recover. And unless that happens, it will be difficult to create jobs. There’s a real need now to step up spending because otherwise the economy could slip further.