High growth story doesn’t quite add up

The Q1-FY17 GDP data is as usual interesting even though eyebrows continue to be raised when interpreting these numbers. The ground-level picture often does not match the buoyancy that these numbers suggest.

This, in a way, is unavoidable, as we are now using a new methodology which may be overstating numbers. It has become a habit for the market to discount these numbers by 1-1.5 per cent. Notwithstanding these limitations, there are ten issues that emerge.

The first pertains to the GVA (gross value added) growth number, which is downbeat at 7.3 per cent but is probably on expected lines. The extrapolation of this trend for the entire year suggests a marginally rise, and this is what the RBI has also stated in its annual report. At 7.6 per cent, we will still be falling short of the 8 per cent number which has a strong psychological effect on the economy.

Second, it was expected that the GDP growth number would be higher than GVA growth. This is so because the difference between the two is net indirect taxes. As indirect tax collections have been growing at a steady rate one may have expected a positive impact.

However, subsidies had increased sharply against a decline last year (the petrol subsidy had come down). Therefore, GDP growth has been lower than that of GVA.

This should get corrected in the year if the subsidy target for FY17 is adhered to. When GST comes in, the overall collections have to be closely monitored. A revenue neutral tax system may not work and could pull the GDP growth down. Therefore, for GDP growth to take place above the GVA level, the GST rate may have to be placed higher at 20 per cent instead of 18 per cent.

Third, the high growth in manufacturing value added at 9.1 per cent on top of 7.3 per cent last year is not convincing considering that IIP growth has been low and volatile. Corporate results for manufacturing in terms of sales growth is just about positive but has yet resulted in a high growth rate in value added.

Should one be pleased about this growth rate? At best the answer is a shoulder shrug, considering that employment and production data do not seem to be commensurate with value added.

Fourth, the construction sector has shown an increase of 1.5 per cent against 5.6 last year. This is despite the Government reportedly spending heavily on roads. This has actually not been happening, and has also been pointed out by the RBI in its annual report. Given that the Q2 period would not witness such spending due to the monsoon, there will be a lull in the next quarter too.

Fifth, the trade, hotel, transport group has slowed down and presents an ambiguous picture. Sales tax has gone up, which means sales are increasing, which goes unreflected in the corporate balance sheets.

The railways have witnessed de-growth in both freight and passenger traffic. But ports and civil aviation are buoyant; the former seems out of place with foreign trade still being down and exports declining by 2 per cent and imports by 14.5 per cent.

Sixth, the finance, insurance and real estate sectors continue to do well, with banking being under the pressure of NPAs and capital. Growth has hence been driven by real estate and professional services which grew by 74 per cent. Now, with bank credit to the retail segment (mainly mortgages) being the driving force, real estate seems to be the prime driver of services; this raises some apprehensions considering that this is a volatile sector. Ideally a steady growth in real estate would provide comfort.

Seventh, the public administration segment has witnessed a 12.3 per cent increase, which is essentially the consumption expenditure of the Government. This will continue to be buoyant as the pay commission outflows set in, driving the economy. The only downside is that ideally, higher expenditure on capex would have been preferable.

Eighth, the rate of gross capital formation has come down further by almost 3 percentage points (31.6 per cent to 28.3 per cent). It does appear that both government and private investment have come down. The expected increase in government capex in roads and railways has not yet materialised fully but if the budgeted amounts are met, there would be traction in the coming quarters. The Government would have to step up its capex to the extent that the fiscal space allows and the private sector could get into investment mode once the capacity utilisation rates improve — it is presently around 70-72 per cent. The RBI had indicated in its annual report that it does not expect too much traction here, and hence this trend may be expected in the next three quarters too.

Ninth, exports in rupee terms have shown an increase of 3.2 per cent, which may be attributed more to rupee depreciation than a turnaround in the quantum of exports which are determined by global demand conditions.

These do not appear to be in take-off mode . The RBI also has concurred on this view.

Last, the so-called bright star on the expenditure side has been consumption which has to increase at a faster rate to propel growth. In the first quarter growth was of the order of 6.7 per cent and it is expected that there will be acceleration in this rate in Q3 and Q4 when rural demand increases on account of a better harvest, and the impact of the pay commission payouts have the desired effect.

However, this should not be overstated as incremental farm income on account of kharif harvest would involve additional income to the extent of ₹15,000-25,000 crore depending on the output and price movements; higher output would also lead to tempering of prices.

The Q1 GDP numbers are hence quite indicative of the state of things to follow. It is likely to be along the 7.5-7.8 per cent path with all the demand-side factors playing a role. Investment is likely to remain downbeat and the Centre’s efforts at stimulus will be muted and limited to what has been said in the Budget.

In this situation, a further cut in interest rates may not quite have the desired effect on investment, though it could improve corporate profitability at the margin.

In short, it will be stable times during the year with some marginal improvements along the way.

The writer is chief economist at CARE Ratings. The views are personal