After old and new series, the GDP-vs-GVA conundrum
If there wasn’t enough confusion already between GDP data based on the old series and the new series, we are now challenged with inconsistent trends in the GDP and GVA—in Q4FY15, GDP grew at 7.5% versus GVA at 6.1% but in Q1FY16, GVA has risen 7.1% compared to just 7% for GDP. One explanation is there is a problem with the deflators used—else, the sharp hike in indirect tax collections and a tempered subsidy bill should have boosted GDP. Since GVA strips out the impact of both taxes and subsidies, it is probably a better metric to use. And that suggests the economy is recovering, albeit at a modest pace. At 1.9% y-o-y, agriculture remains sluggish, and the poor monsoon could worsen growth—Hero MotoCorp’s sales in August fell a sharp 14%. The services sector too seems to be holding up, even if the Q1 increase of 8.9% was the lowest in four quarters—not surprising, since bank credit has moderated and the real estate space remains in a slump. The 6.5% y-o-y rise in industry for Q1 is around the average of the last four quarters—the key here, though, is the order books of engineering firms and the production of steel. While private consumption, at 7.4%, has held up—it averaged 7% in the last 15 quarters, and was 7.9% in Q4FY15—government consumption grew at a very modest 1.2%, suggesting the government may not have front-loaded spends as widely perceived.
With the possible damage to the kharif crop from either scanty or too much rainfall, rural consumption could well stay subdued; the auto sales volumes for August should have looked far more robust as dealers normally stock up ahead of the festive season. While there is an uptick in commercial vehicles sales—at Tata Motors, sales of M&HCVs grew 31% y-o-y in August, suggesting some pick-up in demand, but these come off a low base. While the 4.9% rise in gross fixed capital formation is encouraging—the highest in five quarters—and suggests the government is driving investment, for the capex cycle to turn meaningfully, the private sector must play the bigger role. That looks somewhat difficult in the near future since corporate balance sheets remain highly leveraged and the global economy is likely to stay weak, hurting exports that have now shrunk eight months in a row—more important, government policy in big investment sectors such as oil and telecom continues to hurt investors. While investment demand is unlikely to be spurred by lower interest rates, given there is surplus capacity, consumers might spend more if they are able to borrow cheaper. There is a good case for RBI to cut policy rates when it meets at the end of September.