Despite a favourable base effect, several sectors have slowed down in the last few months at a time when they should have been accelerating. Rural wages, for instance, grew at just 4.2% y-o-y in December, compared with 6.7% y-o-y in July. The production of steel, too, has been slower in the three months to February, compared to the 6% plus y-o-y increase in the previous three months, while the pace of both the production and off-take of coal has decelerated sharply. To be sure, some segments are showing momentum; cement, for instance, or port traffic or sales of tractors and two-wheelers, which have been brisk. While consumption is retaining much of its momentum, investments are sluggish—new investments were just `0.8 lakh crore in December, compared with `3.9 lakh crore in September, and even the number of completed projects is fewer, with most of the capex flowing into roads, ports and renewable energy. Gross fixed capital formation in 2017-18 (as a share of GDP) is estimated in the region of 29%, similar to levels seen in 2016-17, but much below the 34.3% in 2011-12. The biggest concern for policy makers, though, would have to be exports—a sector that has huge employment potential. Exports have collapsed, reporting a rise of just 4.5% y-o-y in February, from 26% y-o-y in September and 29% y-o-y in November. Some of this can be set right once the GST refunds are speeded up, but there are structural issues that the government doesn’t seem to be addressing.
Unfortunately, at this point, the economy seems to be facing several headwinds with few tailwinds to speed it up. Global trade is likely to shrink, thanks to tariff wars being fought by the world’s leading countries, and together with elevated crude oil prices, threatens to hurt exports. Interest rates—both in the bond and loan markets—while not rising sharply, remain firm and are unlikely to trend down in a hurry. This will drive up borrowing costs for NBFCs, who will pass it on to customers. While loans to consumers are showing a good increase—whether from banks or from NBFCs—but industry has been borrowing very little. The banks, which have traditionally lent to companies, small and large, have turned cautious and are likely to stay that way, until they sort out issues of non-performing assets.
To get the economy going, the government needs to fix the farm sector where, despite bumper harvests, farmers are not able to get a good price for their output. While compensating farmers for a low market price will drive up rural incomes, it would leave the government with less to spend on other areas. Even otherwise, expenditure for both the states and the Centre is tipped to slow in 2018-19 to around 10%, from levels of 14-15% in the current year. Both manufacturing and services slowed down in 2017-18, so companies will remain cautious both on capex and hiring. Regulatory issues will hold back a revival in the real estate space which, in turn, will leave the construction sector depressed. Without a meaningful recovery in these two key areas, growth will most certainly decelerate, especially since the base effect in set to turn unfavourable. Expectations of a 7.4% GDP growth in 2018-19, even on a modest increase of 6.6% in 2017-18, may be misplaced.