The other over-estimation by the CSO, where consumption is concerned, lies in government expenditure, where the implied growth for H2 is 8.5% y-o-y. Unless there has been a rethink on the deficit—the government does not intend to prune expenditure, but to spend as planned—an increase of 8.5% y-o-y looks very unlikely.
The quibble that most economists seem to have with the advance estimates for FY20—which put GDP growth for the year at 5%—is that growth in consumption seems to have been overestimated. The asking rate for private consumption in H2 of 7.3% year-on-year (y-o-y) does appear challenging given the reading in H1 was just 4.1% y-o-y. To be sure, H2 covers the festive season and holiday season too, but the festive season was a dull one and manufacturers haven’t reported any meaningful increase in consumer spends. To assume, therefore, that there would be a big upswing in demand in the last few months of the year might be stretching it. As analysts at Nomura point out, viewed from a three-month moving average basis, most consumption-demand indicators remain deep in contractionary territory. And, given little else is changing on the ground—one doesn’t read about bigger investments or more jobs being created—it is not clear why and how consumers will be spending more. Real wages for rural workers actually contracted in September-November period, suggesting the farm economy remains in the doldrums. If analysts are talking of ‘better’ momentum in some categories, they are often referring to a smaller contraction in sales volumes rather than any big jump in buying; for instance, car sales fell only 8.1% y-o-y in November compared with 18.3% y-o-y in October.
The other over-estimation by the CSO, where consumption is concerned, lies in government expenditure, where the implied growth for H2 is 8.5% y-o-y. Unless there has been a rethink on the deficit—the government does not intend to prune expenditure, but to spend as planned—an increase of 8.5% y-o-y looks very unlikely. The fact is consumer confidence has slipped and can only be revived once more investment takes place. The capex data for Q3FY20 was slightly better, but doesn’t reflect any major change in the investment environment. New projects announcements were up 38% y-o-y, but more than 60% of the projects, analysts pointed out, had poor visibility. Moreover, not many more projects are being completed; the growth was flat. Unfortunately, many projects that had taken off have been halted midway for various reasons, data from CMIE showed. Much of this ties in with the production data in sectors such as coal, steel, cement or electricity, where there has been a fair bit of contraction in October and November. Against this backdrop, the CSO’s estimate that the industry would grow 3.8% in H2 too seems optimistic, even if the government pushes infrastructure projects; industry grew at a lowly 0.6% in H1.
The macro environment isn’t reassuring, banks remain reluctant to lend, except to the very best customers and the NPA problem isn’t quite over. So, it is difficult to see credit flows improving meaningfully for at least another six months. Worse, prices of several commodities—including crude oil—have been going up, suggesting inflation could spike. Therefore, even if the fisc is tightly controlled, chances of interest rates coming down further now look remote. There is also bad news from the rest of the world, especially the US, where chances of a recession are rising as suspected, when the yield curve saw an inversion late last year; a recent Reuters poll said an economic rebound is not expected soon. That seems to be much the story for India too. The worst is not over, and FY20 could see the economy grow at sub-5%.