Excise data looks promising, but need to be cautious.
Data put out by finance minister Arun Jaitley, of a 37.3% hike in indirect taxes in May and, within this, an 84% hike in excise collections, would normally be a cause for celebration. More so since this performance follows an equally spectacular one in April, when indirect taxes rose 46% and excise duties 112%. Even after you strip out the impact of the increase in excise duties on petrol and diesel and the withdrawal of exemptions on motor vehicles and consumer durables, the FM said, indirect tax collections rose 12.6% in April and May over last year—that’s an impressive number considering the track record. In the case of excise duties, for instance, collections rose an impressive 27.3% in Q4FY15, but once you strip out the impact of the excise increase in oil products, the growth was marginally negative. So, the question arises, what caused such a spurt in growth since most other high-frequency data suggest the economy is crawling, never mind what the GDP data might show. Corporate sales, for instance, contracted 3.7% in Q4FY15 for a sample of 1,991 companies that excluded financial and oil marketing firms. Core sector contracted 0.4% in April while March IIP growth more than halved to 2.1% as compared to 4.9% in February. And, as growth patterns have shown over the past few quarters, GDP growth has been very largely contingent upon government spending—the fact that this grew 28% year-on-year in April augurs well, but the impact of this will be felt in the future, it cannot explain the jump in tax collections in April or May.
Part of the pick-up, as in all such cases, has to do with the base effect. Passenger car sales, for instance, contracted 11% in April last year and then remained flat at 0.2% in May last year—not surprisingly, car sales registered an 18.1% jump in April this year and 7.7% in May. Medium and heavy commercial vehicles, which registered a sharp increase in sales in April and May, also had a similar base effect—they contracted 11.8% and 4.6% in April and May last year, and rose 25% and 25.4% in the same months this year. But, on the other hand, manufacturing PMI rose from 51.3 in April to 52.6 in May and non-oil, non-gold imports also rose 6.7% in May as compared to 1.3% in April. And, within IIP, capital goods have been growing for the last few months, though aided by the base effect. The fact that the value of stuck projects is coming down a bit also suggests that, this time around, the investment revival will require less capital than in earlier periods since a large part of capital has already been invested in these projects. So, while bank credit shrank in the last two months, this may actually be a lagging indicator now—also, with corporates accessing bond finance, the bank credit data presents a worse picture than the real one. Given the tenuous nature of the data and how dependent it is on the base effect, though, it would be a good idea to wait for a few months before pronouncing a final verdict, either way.