Column: Where are these green shoots?

Most micro data is at several-year lows, and govt spending is predicated on an ambitious tax growth target

Foreign funds may be buying truckloads of Indian stocks but that hasn’t made the slightest difference to the sales of trucks which are moving as slowly as ever; nor for that matter, are sales of two-wheelers or cement gathering speed.

Two-wheeler volumes fell 2% y-o-y in March, the lowest in two years, while cement volumes contracted 10% in the three months to March.

Any green shoots that have been spotted must have sprouted in outer space because there aren’t any on the ground.

Take credit off-take, the best proxy for the economy—it came in at a mind-numbing sub-10% last year, a
22-year low. Just for the record, deposits last year grew at a 50-year low!

If the sectoral data wasn’t bad enough—at 2% in March, railway traffic grew at the lowest levels since October 2013 despite coal production being higher by 7% y-o-y—there are other worries, including the slower increase in rural wages, of around 6%. And then there are corporate profits, which don’t seem to meet the most tempered of expectations. If there truly was a turnaround under way, as has been the contention of many, how is it that more than 50% of companies that have reported results for the March quarter haven’t been able to deliver in line with estimates? And if the core sector contracted 0.1% in March—the smallest output growth in the last decade—how can there be a recovery? For the more data-inclined, the one–year core growth is at a 5-year low.


Those betting on the base effect could be disappointed. Right now, exports are doing badly, to put it mildly, and given how the recovery in the US is turning out to be far more fragile than anticipated, there doesn’t seem much chance of a meaningful pick-up. Buyers have wisened up and any depreciation in the currency will need to be used on discounts, just to ensure the volumes stay where they are.


It is this logjam that the budget, and increased government spending was supposed to address. The bad news, however, is that things are not going to get much better soon because spending growth is going to remain muted. The private sector is not interested in expanding and it can’t be blamed because with so much surplus capacity and interest rates fairly elevated, there isn’t a reason to do so. Those companies that have the cash will simply buy out the others that don’t—in other words, the M&As won’t necessarily result in greater capacity creation.

The situation isn’t much better for government finances—since it has generously agreed to pass on 42% of its tax collections to the states—R2 lakh crore in FY16—its net tax revenues this year at R9.2 lakh crore will be flat over FY15. And that is assuming it manages to hit its gross tax revenue target of R14.5 lakh crore. This is a 16% hike over the FY15 revised estimates, so a lot of buoyancy is being assumed since FY15 growth was a mere 10%.

The 25% hike in capital spending by the central government—it plans to spend R2.4 lakh crore in FY16—seems stunning, but that’s largely because the base is pitifully low; capex for the 9 months to December dropped 13% y-o-y because the government needed to trim its expenses. It would be wise, therefore, to hold back the enthusiasm on how more of the total expenditure is going to be channelled into capital expenditure—the highest in eight years, at 13.6% of total expenditure no less!—because the actual amount spent might not be much. At least, not good enough to get the economy going.

That’s why the government’s success in the markets is important. At R69,500 crore the disinvestment target might appear ambitious, but it may just happen—remember, the foreigners are buying truckloads of stocks! On a more serious note, at current prices, a 5% stake sale each in Coal India and ONGC will fetch it close to R25,000 crore, and if it plays its cards well, that could become R30,000 crore. And then, there’s always SUUTI to dip into, which is what the government should be doing if it wants to spend anywhere close to R2.42 lakh crore.

The states must play their part, but the bad news is that there doesn’t seem to be much room for a ramp-up in capex; as CLSA points out, state-level capex spends grew at 39% to R3.1 lakh crore last year but the forecast for FY16 is a more muted 14% as all states barring Kerala have budgeted for a lower increase this year. Gujarat, Rajasthan and Odisha have pencilled in just 8% more. Nevertheless, with the overall state expenditure expected to rise by 8.2% over a 31.4% rise in FY15, CLSA believes the revenue cushion leaves room for an upside. So does the Centre: It is hoping, for instance, that 50-65% of the R2 lakh crore tab for smart cities, over the next five years, will be picked up by state governments and local bodies.

Let’s keep our fingers crossed and hope it all falls into place. In the meantime, let’s not get carried away by a dramatic improvement in the macro-environment—the credit for which mostly goes to China, since the collapse in its growth is largely responsible for the collapse in commodity prices. And let’s pray to the rain gods.

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