From all appearances, what little spending the government does over the next few months would be for small farmers and rural workers, which can’t stimulate demand.
The large shortfalls in GST collections make it abundantly clear the government will need to scale back on expenditure if it wants to keep the fisc from going off-kilter; for the eight months to November, the deficit is at 115% of the target while the government has spent `16.1 lakh crore of the budgeted `24.4 lakh crore. Even in the September quarter, the increase in the government’s spend of 12.7% y-o-y came off a very weak base of 3.8%. The lower-than-planned expenditure will probably hurt the economy and will allow for a growth of 6.6-6.7% at best in H2FY19, well below the 7.6% clocked in H1FY19. This is bad news at a time when the private sector is investing very little and the bigger investments have been made in distressed assets that are being sold via the IBC route. Also, the nascent recovery in capital formation and manufacturing could reverse. As a share of GDP, gross fixed capital formation stood at 32.3% in Q2—the highest in nine quarters—driven by government capex.
Essentially, a slowdown means the environment for job creation will remain weak with few opportunities being thrown up. That, in turn, will stymie consumption. The wholesale volumes reported by auto manufacturers in the last three months are evidence of the limited purchasing power with consumers—the last festive season was one of the dullest in years. RBI’s urban consumer confidence survey continues to reflect pessimism.
The poor demand will continue to impact the performance of companies—net profits for a sample of 1,851 companies (excluding banks and financials) rose by just 5% y-o-y in the three months to September, if support from other income was excluded. What is happening is that costs continue to weigh on P&L, squeezing margins. Also, the sum of the EBITDA and the wages—a proxy for GVA—grew at 8% y-o-y in Q2FY19, much slower than the 20% y-o-y increase in Q1FY19. To be sure, the crash in crude oil prices, which will drive down prices of other products, will help from here on. While the government has been lowering the GST on goods, such measures can’t drive up consumer spends meaningfully. What is needed is big ticket spends such as that on homes.
Going by the subdued sales in the real estate space, aggregate demand appears to be weak. The private final consumption expenditure grew at just 7% y-o-y; in Q1FY19, it had grown at a more robust 8.6% y-o-y on a similar base. From all appearances, what little spending the government does over the next few months would be for small farmers and rural workers, which can’t stimulate demand. It needs to focus on construction to create jobs and demand for materials like steel and cement.
This sector has been languishing since the end of 2012. The September quarter growth of 7.8% y-o-y, too, was very slow and came off a base of just 3.8%. Smaller businesses need support by way of cheaper loans. The government must ease regulations to ensure the telecom sector gets back on its feet because this sector has seen the biggest job losses in the past two years. Right now, the government’s best option would be to let the deficit slip; else, India won’t clock even a 7% GDP growth rate.