Credit and core data suggest upturn may be limited
While many thought the 5.7% Q1 GDP growth suggested the economy may have turned around, it was always obvious growth was tenuous—the data was for the pre-drought period and even the 3.5% manufacturing growth was after several quarters of negative or anaemic growth. Subsequent data have borne this out and, at 11%, the latest credit growth numbers are a four-year low—nor is it that companies are borrowing money from other sources or raising it in the capital market. Indeed, the core sector data out on Monday indicates a similar sluggish behaviour. After averaging 4.6% for Q1, core sector growth in July was a modest 2.7%. This sector is broadly reflective of what is happening in the infra space. Though positive at 52.4 in August, the HSBC manufacturing PMI was lower than the 53 in July. The slowing in the services PMI is even more dramatic; from 54.4 in June, it slowed to 52.2 in July and to 50.6 in August. While services PMI has come off for all sub-categories like new business and outstanding business, the biggest decline has, ironically, been in business expectations, from 69.8 in June to a much lower 62 in August. While the PMI covers only the private sector and is a sample-based survey over the previous month, it is still indicative of the mood. The CAD for the first quarter looks good at 1.7% which is a more of a relief as any disturbance on the external front creates diversion in economic attention. But this is more due to compressed gold imports and stable oil prices, and not really due to any breakthrough in exports.
In other words, the data quite clearly show the GDP data was pumped up by some amount of pre-election optimism, a sudden rush of government spending after FY14’s sharp compression—in nominal terms, government expenditure rose 16% in Q1, a number that will be difficult to repeat in the coming quarters with a little over 60% of the fiscal deficit being consumed in the first 4 months. As we go along, we will encounter several such contrasting pictures due to the ‘base effect’. Low numbers for two successive years adds statistical buoyancy to numbers. Therefore, we have the case of the cement industry growing by 11.1% during April-July and coal by 5.7% because of low or negative growth last year. Hopefully, the government will not get carried away by these numbers and relentlessly pursue the path of reform and pitch in where it is required so that the growth process is not derailed.