Manufacturing has grown a reasonable 9.9% y-o-y—ostensibly recovering from the damage due to demonetisation and GST, and also on the back of better demand for steel and cement from the construction sector.
With a 7.7% y-o-y print in the March quarter, the economy is clearly on an up-trend, the weak base notwithstanding. But, it is the government that is doing all the hard work; much of momentum in Q4FY18 was the result of government spends, up nearly 17% y-o-y, and agriculture that is up 4.5% y-o-y. The private sector simply isn’t pulling its weight. That can be seen from the deceleration in the core-GVA—the growth in value-add excluding agriculture and public services. This grew by just 7.2% y-o-y, slower than the 7.4% y-o-y in the previous quarter, and that too off a very low base growth of just 4.1% y-o-y.
The government’s efforts of course, have paid off quite well. The pick-up in construction, for instance, at 11.5% y-o-y, comes on the back of the big build-out of roads and the affordable housing push.
Manufacturing has grown a reasonable 9.9% y-o-y—ostensibly recovering from the damage due to demonetisation and GST, and also on the back of better demand for steel and cement from the construction sector. However, unless the spending sustains at these levels, and agriculture does well, growth could stall. For the momentum to pick up pace, the private sector must show some spunk.
As of now, there isn’t much evidence that the private sector wants to add capacity—the availability of capacity in the form of distressed assets has also precluded the need for new plants in sectors such as steel and cement.
The fairly chunky investments in roads, railways and power equipment have driven up the GFCF (gross fixed capital formation) by 14.4%, albeit on a very weak base. While engineering firms’ order books are filling up, much of this is the doing of government firms. Commentary from the Larsen & Toubro management suggests a revival in private sector capex is two to three years away.
What is curious and disconcerting is the relatively subdued performance of the consumption piece, which was meant to be the stronger growth engine. To be sure, the private final consumption expenditure (PFCE) recovered in Q4FY18 to grow at 6.7% y-o-y, in sync with the strong sales of cars and two-wheelers. That is probably the result of the raise that government employees got some time back and more cash in the system. The revival, however, comes of a very weak base—the growth in Q4FY17 was just 3.4%. Moreover, the trend line isn’t comforting at all—the PFCE has clocked a sub-7% growth for five straight quarters now.
Economists say there is a shortage of cash relative to the rise in nominal GDP over the past year that could be holding back spends. Moreover, the rural distress, even if limited to the agri-economy, would have tempered spends—it is a fact rural wages are rising more slowly.
The big drag on the economy, these last couple of years, has been exports. In the March quarter, this grew a weak 3.6% y-o-y, at a time when the global environment has been reasonably strong, suggesting the inadequate local infrastructure and rigid labour laws or uncompetitive wages could be a hurdle. The trade tensions between the US and China threaten to hurt global trade, which then could have deleterious consequences for India. Slowing global trade, elevated crude oil prices and rising interest rates could leave growth muted despite a favourable base effect.