There is no quick fix, to grow at more than this serious policy reforms are required in most sectors of the economy.
The economy has grown at a very disappointing 7.1% y-o-y in the three months to September, despite a benign base, taking the growth in H1 to 7.4%. There were some hints in the corporate numbers—net profits for a sample of 1,851 companies (excluding banks and financials) rose by just 5% y-o-y if support from other income was excluded. Also, the sum of the ebitda (earnings before interest, tax, depreciation and amortisation) and the wages—a proxy for GVA—grew at 8% y-o-y, way slower than the 20% y-o-y increase in Q1FY19.
While the macro-environment today is much better than it was even a month back—oil prices have fallen sharply, interest rates are coming down and the rupee has retraced much of its losses—real interest rates are high and liquidity is inadequate, stymieing both consumption and business. The central bank must take steps to ensure small businesses, in particular, aren’t starved for funds. Already, among the biggest disappointments in Q2 was private final consumption expenditure that 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. The poor automobile sales during the festival season were a clear indication of how stretched consumers’ pockets are. Until they become more sure of their jobs and incomes, purchases of big ticket items like real estate—a big catalyst for the economy—will remain subdued.
As for the rural economy, the non-farm part seems to be creating some demand, but the farm segment is in clear distress. Farm prices are much lower than the MSPs promised by the government since there is little procurement so far and, in the absence of a truly pan-Indian market, farmers aren’t going to be able to get much better prices either. Moreover, loan waivers—now at over Rs 1.5 lakh crore—can only help temporarily. Unless demand revives, the nascent recovery in capital formation, and manufacturing could reverse. The good news is that, as a share of GDP, gross fixed capital formation stood at 32.3% in Q2, the highest in nine quarters.
The biggest spender—government—too will slow down because the fiscal situation is now more fragile; the rise of 12.7% y-o-y in Q2 masks the anaemic base of 3.8%. The other big concern, for several years now, has been construction. A big generator of jobs and consumer of materials such as steel and cement, this sector has been languishing since Q4FY12. Indeed, the biggest chunk of the economy—services—has done badly, dragged down by trade/hotels/transport that slowed to 6.8% y-o-y and finance that grew at just 6.3% y-o-y. Both these are reining in the GVA growth, which, in Q2, rose at just 6.9%. Sectors such as telecom remain in trouble. Given the problems with banks, NBFCs and HFCs, it is hard to see how much better this segment can fare in the coming quarters. Also, while both industry and agriculture fared reasonably well in Q2FY19, it doesn’t seem to have given the services space the kind of fillip it should have. If this sluggish growth has to be reversed, the government needs to make the business environment more conducive. This includes genuine agriculture reform so that farmers can get better prices for their produce and making regulations more industry-friendly. This could bring quick relief to sectors like telecom that has seen thousands of jobs lost over the past two years. Else, FY20 will also see the economy growing at the new Hindu rate of growth, of 7%.