With GDP growth at 7.3% year-on-year in FY15, only marginally lower than the advance estimate of 7.4%, India can boast to be the fastest-growing economy, dethroning China. Growth that was expected at around 5.5% based on the old methodology jumped by almost 200 basis points based on the new series. This itself has raised widespread disbelief, resulting in the government appointing a three-member committee to review the estimates. It is, however, rather surprising that the committee is being headed by Pronab Sen who had already strongly endorsed the new estimates!
The fourth quarter real-GDP, at market prices, grew almost 100 bps higher (at 7.5% yoy) from 6.6% in the third quarter, despite public expenditure having registered negative growth and exports declining by 8%.
Interestingly, the third quarter (October-December 2014) GDP was revised lower, from 7.5% to 6.6%, while that of second quarter (July-September 2014) was revised higher, to 8.4% from 7.8%. Such frequent revisions to quarterly GDP numbers, soon after their release, do not add to their credibility.
However, GDP growth from the supply-side (GVA at basic prices) projected a different picture, with a growth rate of 6.1% yoy—lower than the 6.8% clocked in the previous quarter. The lower growth was due to the contraction in the agriculture sector due to adverse weather and the almost-flat public sector spending offsetting the strong growth in manufacturing (8.4% in Q4 from 3.6% in Q3) and ‘trade, hotel, transport and communication’ (14.1% in Q4 from 7.4% in Q3).
Our apprehension of persistent economic weakness is echoed by the central bank. RBI has justified its rate cut on June 2 by suggesting that actual growth is weaker than reflected by the headline numbers released by the CSO. It also pointed to the lower domestic capacity utilisation, still-mixed indicators of recovery and subdued investment and credit growth as basis for its monetary policy relaxation. This divergence between the two official agencies—RBI and CSO—on the economy’s performance has confused investors and resulted in avoidable churning in equity markets.
According to the CSO, private final consumption expenditure (PFCE) and investment (indicated by Gross Fixed Capital Formation) growth improved smartly during January-March 2015 from the previous quarter, contributing 58% and 17%, respectively, to total growth. Even net exports contributed positively as imports declined more than exports. As expected, government consumption contracted as expenditure had to be contained to meet the challenging fiscal deficit target.
Normally, growth in PFCE, a macro variable, is closely correlated with growth in corporate income and sales, which reflect the state of the ‘micro-economy’. Rural consumption has been under pressure due to moderate rise in MSP, slower rural wage growth, weak agricultural production due to adverse weather and government expenditure cuts. This is also reflected in the softer two-wheeler and tractor sales growth, coupled with poor sales of FMCG companies. Going forward, another year of poor monsoon will increase the downside risks to consumption growth. One hopes that CSO’s macro consumption estimates will better reflect and get in sync with the ground realities in the corporate sector.
Investment reflects a somewhat better picture. CMIE data shows that new project announcements are rising, projects abandoned are declining and projects under implementation are just beginning to perk up.
The fly in the ointment is the sharply declining rate of growth of credit off-take by corporates from commercial banks—it has fallen to below 4%. This is reinforced by the statement, made in private, by senior industry representatives that private investment activity is at a stand-still and no capacity expansion is on the cards. This would put a question mark on project-level data that show some rise in investment activity. Moreover, exports have declined for five months continuously and core-sector growth remains weak.
According to the latest RBI survey report, capacity utilisation in the corporate sector in Q3FY15 (October-December 2014) remains well below the level in the same period of the previous year. Growth of new orders also showed a decline and became negative in Q3FY15, both on a year-on-year and quarter-on-quarter basis. As seen in the accompanying chart, there is a broad co-movement between capacity utilisation and de-trended IIP manufacturing, which remained in negative territory until the end of December 2014. It has perked up a bit in the first quarter of this year but with continued decline in exports and weak core sector growth, the industrial sector is surely not in robust health.
Thus, there is a mixed picture for both private investment and industrial growth. Private investment pick-up is at a nascent state of recovery and needs to be nurtured by strong support from growth in public capital expenditure. The government has clearly recognised this, as reflected in 9.1% of the total annual expenditure being spent in a single month (April 2015) as against an average of 6-7% seen since 2011. A large chunk of this expenditure in April was in the ministries of road transport & highways and rural development—that demonstrates government’s resolve to hike public capital expenditure.
RBI might pause going forward to get a clear idea regarding the monsoon situation and the impact of US Fed rate hike, but we do not rule out further rate cuts if inflation remains within the expected glide path and growth pick-up remains anaemic. However, RBI might expect stronger growth-generating policies from the government. It is critical that all the agencies, CSO, RBI and North Block get on the same page soon to shore up investor confidence.
Das Krishna is Senior Researcher and Kumar is Senior Fellow, CPR